Misrep Remedies
Cases
Car & Universal Finance Company Ltd v Caldwell
[1963] EWCA Civ 4 [1964] 1 All ER 290, [1965] QB 525, [1965] 1 QB 525, [1964] 2 WLR 600
LORD JUSTICE SELLERS:
This appeal raises a primary point in the law of contract. The question has arisen whether a contract which is voidable by one party can in any circumstances be terminated by that party without his rescission being communicated to the other party.
Lord Denning, Master of the Rolls, from whom this appeal comes from a trial in the Queen’s Bench, has held in the circumstances of this case that there can be rescission without communication where the seller of a motor car who admittedly had the right to rescind the contract of sale on the ground of fraudulent misrepresentation terminated the contract by an unequivocal act of election which demonstrated clearly that he had elected to rescind it and to be no longer bound by it.
The general rule, no doubt, is that where a party is entitled to rescind a contract and wishes to do so the contract subsists until the opposing party is informed that the contract has been terminated. The difficulty of the seller in this case was that, when he learnt of the fraud and therefore ascertained his right to terminate the bargain, he could not without considerable delay find either the fraudulent buyer or the car which had been sold. Such circumstances would not appear to be so rare in transactions in motor cars (or horses in earlier days) that they would not, it might be thought, have given rise to litigation and an authoritative decision, but it seems that over the years the point in issue has not been decided in any reported case in similar or comparable circumstances.
The case was heard on an agreed statement of facts and of issues arising out of a sheriff’s interpleader, and some oral evidence was called. Briefly, Mr. Caldwell, the defendant in this interpleader, owned a Jaguar motor car which was obtained from him by one Norris, who took the car away from the defendant’s house on Tuesday evening, the 12th January, 1960, having induced the owner to sell it for £975, of which £l0 in cash had been paid as a deposit two days before and for which a cheque for £965 was handed over. As soon as the bank in Brighton on which the cheque was drawn opened at 10 a.m. on the 13th January, Mr. Caldwell discovered that the cheque was worthless and that he had been deceived and defrauded. The car had been obtained by false pretences. A Hillman car was also left as security but the buyer had no title in it to transfer to Mr. Caldwell and it too was worthless to him. It was agreed that Norris acquired a voidable title to the car. Some time on the 13th January Norris sold and delivered the Jaguar to Motobella Company, Limited, and it was further agreed that Motobella had notice of the defect in title and took the vehicle with no better title than that previously vested in Norris. On the 15th January Motobella Company Ltd., sold the car to G. & C. Finance Corporation Ltd., who purported to hire it to one Alfred Harry Knowles, who would appear to have been a fictitious hirer. On the 13th August, 1960, the car was sold to the plaintiffs on this interpleader issue, Car & Universal Finance Company, Ltd., another company dealing in hire purchase finance. Mr. Caldwell’s present claim to the car is based on what he did on the 13th January, 1960, which it is alleged terminated the contract of sale of the previous evening and restored the title in the car to him.
This is what he did. As soon as he learnt from the bank manager that the cheque in payment for the car could not be met and that there had been a similar transaction previously and that the police were looking for Norris, Mr. Caldwell went at once to the police. The police produced a photograph of Norris, whom Mr. Caldwell identified as the man to whom he had sold his car. A warrant was out for the arrest of this man in the name of Rowley. His house had been watched and endeavours had been made to find him. Through the police and the organisation of the Automobile Association Mr. Caldwell made every endeavour to find and recover the car forthwith and to discover the absconding and elusive Norris. Mr. Caldwell clearly wished to terminate the contract of sale and take back the car and acted as far as he could to that end.
The Jaguar was found on the 20th January when it was being driven by a director of Motobella Company, Ltd., who had purported to sell it to the G. & C. Finance Corporation on the 15th January for hire to one Knowles. He claimed that his company had bought it and it was their property, but the claim was not persisted in when the matter came to trial. The Motobella Company Ltd. were sued by Mr. Caldwell for the return of the car and when the action was called on it was not defended and Mr. Caldwell obtained judgment. When he sought to take the car under the judgment the present plaintiffs on the interpleader issue claimed it as theirs. They had the car transferred to them on the 13th August, 1960, and thereafter they seem to have hired it out.
By reason of the transaction completed on the 12th January, 1960, Norris, otherwise Rowley, obtained the property in the car in question. Another man was with Norris, but as he was apparently the servant or agent of Norris no question arises with regard to him.
The sole question on this part of the appeal is whether Mr. Caldwell avoided the contract of sale and recovered his title to the car before the purported sale by Motobella Company Ltd. to G. & C. Finance Corpn. Ltd. on the 15th January, 1960. If Mr. Caldwell did not do so then, subject to the other contention which arises on the appeal, G. & C. Finance Corpn. Ltd. obtained a good title and were able to pass it on to the Car & Universal Finance Company Ltd. later in the same year.
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I am in agreement with the Master of the Rolls, who asked “And is a man in the position of Mr Caldwell ever to be able to rescind the contract when a fraudulent person absconds as Mr. Norris did here?” and answered that he can do so “if he at once, on discovering the fraud, takes all possible steps to regain the goods even though he cannot find the rogue nor communicate with him”.
The appellants contended that in Scarf v. Jardine (7 Appeal Cases page 345) Lord Blackburn laid it down that election to avoid a contract is not completed until the decision has been communicated to the other side “in such a way as to lead the opposite party to believe that he has made that choice”, and they relied on the many works of authority which state that where a right of election exists there has to be communication. Scarf v. Jardine is a very different case from the present. It is so well known and so often cited that it does not call for analysis. In that case Lord Blackburn and, in the various works referred to, the authors had not in mind in enunciating a general principle the circumstances and the arguments which have arisen in the present case.
Even in the light of this statement of the law it was conceded – and rightly so – that if Mr. Caldwell could have found the car and had re-taken it without the knowledge of the buyer, but before resale to an innocent purchaser, the contract would have been at an end and the title restored to Mr. Caldwell. Such an act would have been an unequivocal act of election to disaffirm the contract.
In the case of an innocent misrepresentation in circumstances which would permit the party misled to rescind, the other party would not deliberately avoid communication (for that would seem to negative innocence) and circumstances would be rare where communication could not be readily made in one way or another. If communication was possible it is difficult to see how there could be rescission without communication and the inference would be that the contracting parties required communication of termination. Special circumstances may arise and call for future consideration but I do not think the appellants’ comparison in argument between innocent and fraudulent misrepresentation invalidates the learned Master of the Rolls’ judgment.
It has to be recognised that in transactions such as this where fraud intervenes, some innocent party may have to suffer and it may well be that legislation is overdue to do justice between the victims of fraud and to apportion in some way the loss. But in the present case I can see nothing unjust in the loss falling on the G. & C. Finance Corporation Ltd. (against whom the appellants can claim redress) who made the minimum enquiries, who bought a car which apparently they never saw and hired it out to a man of those existence and identity they did not know and who may well have been fictitious, rather than that the loss should fall on Mr. Caldwell who acted immediately and did all in his power to retract the transaction.
I would dismiss the appeal on this issue and that is sufficient to decide the appeal in the respondent’s favour.
be dismissed.
LORD JUSTICE DAVIES: I agree.
It is, indeed, curious that the point at issue in the present case appears to be free from any direct authority and not to have been considered in any of the text books.
Norris obtains the car from Caldwell under a contract procured by the fraud or false pretences of Norris. Caldwell has thus the right as against Norris upon ascertaining the true facts to rescind the contract. If by his conduct Norris makes it impossible for Caldwell either to communicate to Norris his decision to rescind or to retake the car, how, if at all, can Caldwell exercise his right to rescind?
The contention for the appellants is that the party entitled to rescind can exercise that right only by communicating his decision to the other party by words or conduct or alternatively, where the title to the goods is in question, by actually retaking possession of the goods; and that, therefore, in the present case, as Caldwell did neither of these things before the 15th January, when the car was transferred to the G. & C. Finance Corporation, Ltd., the latter, having bought in good faith and without notice of any defect in the title, acquired a good title to the car.
Mr. Finer for the respondent agrees that an election or decision to rescind, in order to be effective, must be exercised unequivocally, or, to use the phrase of Lord Hatherley, Lord Chancellor, in Reese River Silver Mining Co. v. Smith (1869), Law Reports 4 House of Lords 64, at page 74, “in the plainest and most open manner competent”. He agrees also that in the overwhelming number of cases communication to the other party would probably be essential. But, he submits, the question whether the election to rescind has been validly exercised is always one of fact (Longman v. Hill (1891), 7 Times Law Reports page 639); and the essential question always is whether the party having the right to rescind did all that was in his power in the circumstances to make his decision unequivocally known.
In my judgment, the admission by the appellants that recaption is an exception to the allegedly universal necessity for communication is important. Curiously enough, though both Mr. Capler and Mr. Finer agreed that recaption without communication is a sufficient act of rescission, no very clear authority was cited to that effect, except possibly the decision of Mr. Justice Bigham in In re Eastgate, (1905 1 King’s Bench page 465). It is true that recaption is a plain act of resumption of dominion over the goods.
But if the fact of the recaption is unknown to the other party, there is obviously no communication to him. We were much pressed by Mr. Caplan on another part of his argument with the case of an innocent misrepresentation. But it is to be observed that a person who has obtained goods by an innocent misrepresentation might well in all innocence purport to transfer the goods to a third party at a time after the goods had without the representor’s knowledge been retaken by the representee, so that the purported transfer would be invalid.
On the facts of this case Norris must be taken to have known that Caldwell might on ascertaining the fraud wish to rescind the contract. Norris disappeared, and so did the car. Caldwell could therefore neither communicate with Norris nor retake the car. It must, therefore, I think, be taken to be implied in the transaction between Norris and Caldwell that in the event of Caldwell wishing to rescind he should be entitled to do so by the best of the means possible. Lex non cogit ad impossibilia. It is true that it was conceivably possible that Caldwell might decide not to rescind and to sue on the cheque instead; but it is most doubtful whether on the facts of this case such a possibility could have occurred to Norris as a real one.
The fact that Norris knew that he was a rogue and that there fore Caldwell was likely to be after him distinguishes this case from that of an innocent misrepresentor. It would not occur to the latter that the other party to the contract would have any right or desire to rescind, so that there would be no such implication as that which I have suggested arose in the present case.
It was argued that Caldwell’s action in going to the police and the Automobile Association was not an unequivocal act, since I was open to him to have changed his mind on the next day if, to us Mr. Caplan’s phrase, Norris had suddenly won a football pool and so have become a worthwhile defendant to an action on the cheque. That again, in my opinion, is an unrealistic view of the facts. Caldwell was, as I think, declaring to the world “I have been swindled and I want my car back”. He was declaring his intention as clearly as if he had seen the car in the street and seized it.
In the result, therefore, I agree with the judgment of the learned Master of the Rolls on this ground. But, like my Lords, I do not think that the analogies which the Master of the Rolls drew in support of his judgment were helpful or, with respect, wholly accurate.
Cheltenham Borough Council v Laird
[2009] EWHC 1253 [2009] IRLR 621
Hamblen J
The leading authority on the essentials of the tort of deceit remains Lord Herschell’s judgment in Derry v. Peek [1889] 14 App Cas 337 at 376:
“First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (i) knowingly, (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false.”
The standard of proof required in relation to an allegation of fraud is that of the balance of probabilities. The fact that fraud is a very serious allegation may be relevant to the inherent probabilities of its occurrence, but it does not affect the standard of proof.
In Re H (Minors) [1996] AC 563 Lord Nicholls stated at 586D:
“The balance of probability standard means that a court is satisfied an event occurred if the court considers that on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on a balance of probability. Fraud is usually less likely than negligence.”
This passage was considered by the House of Lords in Re B (Children) (Care Proceedings: Standard of Proof) [2009] 1 AC 11 and most recently by the Court of Appeal in Dadourian Group International Inc & Others v Simms & Others is [2009] EWCA Civ 169 in which the position was summarised by the Court as follows (per Arden LJ at para 32):
“Their Lordships affirmed the decision in Re H and provided an explanation of what Lord Nicholls’ judgment meant. Baroness Hale (with whom the other Law Lords agreed) explained that nothing in Re H suggests that a different standard of proof is to be applied in circumstances where the alleged conduct is particularly serious or unusual. There is one standard of proof and that is the simple balance of probabilities. The fact that the alleged conduct is particularly serious or unusual does not displace or change this fundamental principle. Baroness Hale stated that the inherent probabilities are simply one factor to be taken into account, where relevant, in deciding where the truth lies. However generally “there is no logical or necessary connection between seriousness and probability”. Therefore arguments that Re H had introduced a principle that where a serious allegation is in issue the standard of proof required is higher were incorrect.”
Directing myself in accordance with the authorities, in the light of my findings above I have no doubt that the representations were not made fraudulently, even if false. I also have no doubt that there was no wilful withholding of material matters.
As to whether, on the assumption they were false, the representations were made negligently, there is considerable overlap with the issue of how a reasonable person in Mrs Laird’s position would have understood the questions.
Even if, contrary to my findings, the questions are not to be reasonably understood as I have held, the interpretation I have set out is at least a plausible interpretation of ambiguous questions and I am quite satisfied that it would not be negligent so to interpret them.
Given the ambiguity of the questions asked and Mrs Laird’s reasonable understanding of her medical history, as I have found it to be, it was not negligent of her to answer the questions as she did.
I find that Mrs Laird filled out the medical questionnaire as a reasonable layman might, as Dr McNamara was inclined to accept. She had proper grounds and reasoning for each of her answers. Accordingly she took reasonable care, and did not complete it as no reasonable person would have done (the usual test for negligence). Equally she had reasonable grounds for believing in the truth of the answers she had given.
CBC places particular reliance on Mrs Laird’s evidence that she found some of the questions difficult to understand but did not consult her doctor or GCOHS as the form suggested. However, her doctor was part-time and unavailable; CBC had no human resources department of appropriate personnel to deal with, and all that was given for GCOHS was an address with no telephone number. In any event, she ultimately reasonably concluded that she could complete the form unassisted.
(e) Whether CBC’s remedy for any alleged misrepresentation was restricted to terminating Mrs Laird’s employment, rather than suing for damages;
If I had found there to have been an actionable misrepresentation I would not have held that CBC’s remedy was so restricted.
Mrs Laird relies on the wording in the form: “I declare that the statements… are true and given to the fullest of my ability and knowledge and if I have wilfully withheld any material fact(s), I am, if engaged, liable to the termination of my contract of service”. She contends that this amounts to an agreement that the only remedy available is termination.
In my judgment clearer language than this would be required to exclude the remedies that would ordinarily be available as a matter of law for actionable misrepresentation, let alone for fraudulent misrepresentation. This wording is spelling out the potential consequences of misrepresentation or deliberate withholding of material facts, but it is not circumscribing such consequences.
(f) Whether the Representations were made to CBC for the purposes of the Misrepresentation Act 1967, section 2(1);
Section 2(1) of the 1967 Act provides that:
“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 ….” (emphasis added ).
Mrs Laird submis that because the medical questionnaire was for the use of CBC’s medical advisor, GCOHS, rather than CBC itself the statements made therein were not made “to” CBC within the meaning of the 1967 Act, GCOHS being a separate entity “acting under some independent role”.
In my judgment this is too narrow an interpretation of the 1967 Act and of the purpose of the representations made. Although the immediate representee was GCOHS, the ultimate representee was CBC since it was for its benefit that the questionnaire was being filled in. GCOHS had no independent interest in assessing Mrs Laird’s medical condition. It was doing so for the benefit of the CBC. In such circumstances I consider and find that the representations were being made to CBC, albeit through the filter of GCOHS.
Further, the words “to him” in section 2(1) do not narrow the class of persons who would be representees in law. There is little doubt that at common law and in equity, the representee did not necessarily need to be the person to whom the false statement was made. As stated in Chitty on Contracts. Vol. 1 at 6-028: “[E]very man must be held responsible for the consequences of a false representation made by him to another, upon which a third person acts, and so acting, is injured or damnified, provided it appear that such false representation was made with the intent that it should be acted upon by such third person in the manner that occasions the injury or loss”; per Lord Cairns in Peek v Gurney [1873] LR 6 HL 377, at 413. It is most unlikely that Parliament intended in the 1967 Act to narrow the class of representees to those to whom a representation was directly addressed. “The Act of 1967 does not … alter the rules as to what constitutes an effective misrepresentation”: Chitty on Contracts Vol. 1 at 6-001. No good reason has been advanced as to why such an alteration should have been intended and the consequence would be an illogical fissure between the position under the 1967 Act and at common law.
Clarke v Dickson
(1858) EB & E 148
Crompton J
“..he must be in such a situation as to be able to put the parties into their original state before the contract… But then what did he buy? Shares in a partnership with others. He cannot return those; he has become bound to those others… Take the case I put in argument, of a butcher buying live cattle, killing them, and even selling the meat to his customers. If the rule of law were as the plaintiff contends, that butcher might, upon discovering a fraud on the part of the grazier who sold him the cattle, rescind the contract and get back the whole price: but how could that be consistent with justice? ”
Derry v Peek
[1889] UKHL 1 (1889) LR 14 App Cas 337, 5 TLR 625, (1889) 5 TLR 625, 14 App Cas 337
LORD HERSCHELL: —
My Lords, in the statement of claim in this action the respondent, who is the plaintiff, alleges that the appellants made in a prospectus issued by them certain statements which were untrue, that they well knew that the facts were not as stated in the prospectus, and made the representations fraudulently, and with the view to induce the plaintiff to take shares in the company.
“This action is one which is commonly called an action of deceit, a mere common law action.” This is the description of it given by Cotton L.J. in delivering judgment. I think it important that it should be borne in mind that such an action differs essentially from one brought to obtain rescission of a contract on the ground of misrepresentation of a material fact. The principles which govern the two actions differ widely. Where rescission is claimed it is only necessary to prove that there was misrepresentation; then, however honestly it may have been made, however free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand. In an action of deceit, on the contrary, it is not enough to establish misrepresentation alone; it is conceded on all hands that something more must be proved to cast liability upon the defendant, though it has been a matter of controversy what additional elements are requisite. I lay stress upon this because observations made by learned judges in actions for rescission have been cited and much relied upon at the bar by counsel for the respondent. Care must obviously be observed in applying the language used in relation to such actions to an action of deceit. Even if the scope of the language used extend beyond the particular action which was being dealt with, it must be remembered that the learned judges were not engaged in determining what is necessary to support an action of deceit, or in discriminating with nicety the elements which enter into it.
There is another class of actions which I must refer to also for the purpose of putting it aside. I mean those cases where a person within whose special province it lay to know a particular fact, has given an erroneous answer to an inquiry made with regard to it by a person desirous of ascertaining the fact for the purpose of determining his course accordingly, and has been held bound to make good the assurance he has given. Burrowes v. Lock 10 Ves 470 may be cited as an example, where a trustee had been asked by an intended lender, upon the security of a trust fund, whether notice of any prior incumbrance upon the fund had been given to him. In cases like this it has been said that the circumstance that the answer was honestly made in the belief that it was true affords no defence to the action. Lord Selborne pointed out in Brownlie v. Campbell 5 App Cas at p 935 that these cases were in an altogether different category from actions to recover damages for false representation, such as we are now dealing with.
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In Peek v. Gurney Law Rep 6 HL 377, 409 the same learned Lord, after alluding to the circumstance that the defendants had been acquitted of fraud upon a criminal charge, and that there was a great deal to shew that they were labouring under the impression that the concern had in it the elements of a profitable commercial undertaking, proceeds to say: “They may be absolved from any charge of a wilful design or motive to mislead or defraud the public. But in a civil proceeding of this kind all that your Lordships have to examine is the question, was there, or was there not, misrepresentation in point of fact? If there was, however innocent the motive may have been, your Lordships will be obliged to arrive at the consequences which properly would result from what was done.” In the case then under consideration it was clear that if there had been a false statement of fact it had been knowingly made. Lord Cairns certainly could not have meant that in an action of deceit the only question to be considered was whether or not there was misrepresentation in point of fact. All that he there pointed out was that in such a case motive was immaterial: that it mattered not that there was no design to mislead or defraud the public if a false representation were knowingly made. It was therefore but an affirmation of the law laid down in Foster v. Charles 7 Bing 105 , Polhill v. Walter 3 B & Ad 114 , and other cases I have already referred to.
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Having now drawn attention, I believe, to all the cases having a material bearing upon the question under consideration, I proceed to state briefly the conclusions to which I have been led. I think the authorities establish the following propositions: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.
I think these propositions embrace all that can be supported by decided cases from the time of Pasley v. Freeman 2 Smith’s LC 74 down to Western Bank of Scotland v. Addie Law Rep 1 HL, Sc 145 in 1867, when the first suggestion is to be found that belief in the truth of what he has stated will not suffice to absolve the defendant if his belief be based on no reasonable grounds. I have shewn that this view was at once dissented from by Lord Cranworth, so that there was at the outset as much authority against it as for it. And I have met with no further assertion of Lord Chelmsford’s view until the case of Weir v. Bell 3 Ex D 238 , where it seems to be involved in Lord Justice Cotton’s enunciation of the law of deceit. But no reason is there given in support of the view, it is treated as established law. The dictum of the late Master of the Rolls, that a false statement made through carelessness, which the person making it ought to have known to be untrue, would sustain an action of deceit, carried the matter still further. But that such an action could be maintained notwithstanding an honest belief that the statement made was true, if there were no reasonable grounds for the belief, was, I think, for the first time decided in the case now under appeal.
In my opinion making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds. Indeed Cotton L.J. himself indicated, in the words I have already quoted, that he should not call it fraud. But the whole current of authorities, with which I have so long detained your Lordships, shews to my mind conclusively that fraud is essential to found an action of deceit, and that it cannot be maintained where the acts proved cannot properly be so termed. And the case of Taylor v. Ashton 11 M & W 401 appears to me to be in direct conflict with the dictum of Sir George Jessel, and inconsistent with the view taken by the learned judges in the Court below. I observe that Sir Frederick Pollock, in his able work on Torts (p. 243, note), referring, I presume, to the dicta of Cotton L.J. and Sir George Jessel M.R., says that the actual decision in Taylor v. Ashton 11 M & W 401 is not consistent with the modern cases on the duty of directors of companies. I think he is right. But for the reasons I have given I am unable to hold that anything less than fraud will render directors or any other persons liable to an action of deceit.
At the same time I desire to say distinctly that when a false statement has been made the questions whether there were reasonable grounds for believing it, and what were the means of knowledge in the possession of the person making it, are most weighty matters for consideration. The ground upon which an alleged belief was founded is a most important test of its reality. I can conceive many cases where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the Court that it was not really entertained, and that the representation was a fraudulent one. So, too, although means of knowledge are, as was pointed out by Lord Blackburn in Brownlie v. Campbell 5 App Cas at p 952 , a very different thing from knowledge, if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.
I have arrived with some reluctance at the conclusion to which I have felt myself compelled, for I think those who put before the public a prospectus to induce them to embark their money in a commercial enterprise ought to be vigilant to see that it contains such representations only as are in strict accordance with fact, and I should be very unwilling to give any countenance to the contrary idea. I think there is much to be said for the view that this moral duty ought to some extent to be converted into a legal obligation, and that the want of reasonable care to see that statements, made under such circumstances, are true, should be made an actionable wrong. But this is not a matter fit for discussion on the present occasion. If it is to be done the legislature must intervene and expressly give a right of action in respect of such a departure from duty. It ought not, I think, to be done by straining the law, and holding that to be fraudulent which the tribunal feels cannot properly be so described. I think mischief is likely to result from blurring the distinction between carelessness and fraud, and equally holding a man fraudulent whether his acts can or cannot be justly so designated.
Doyle v Olby (Ironmongers) Ltd
[1969] 2 QB 158
Lord Denning MR
“in contract, the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say:
“I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but, what is more, I have been put to a large amount of extra expense as well and suffered this or that extra damages.”
All such damages can be recovered: and it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen. For instance, in this very case Mr. Doyle has not only lost the money which he paid for the business, which he would never have done if there had been no fraud: he put all that money in and lost it; but also he has been put to expense and loss in trying to run a business which has turned out to be a disaster for him. He is entitled to damages for all his loss, subject, of course to giving credit for any benefit that he has received. There is nothing to be taken off in mitigation: for there is nothing more that he could have done to reduce his loss. He did all that he could reasonably be expected to do.”
East v Maurer
[1990] EWCA Civ 6 [1991] 2 All ER 733, [1991] 1 WLR 461
LORD JUSTICE BELDAM:
Mr. Shawcross, for the appellants, submits that there is a difference in the manner in which damages are assessed for breach of contract and for the tort of deceit^ He says that the authorities show that no damages at all are recoverable for loss of profits in an action of deceit. Although there is no express decision which states that to be the case, in no case which has dealt with the proper measure of damage in an action of deceit, has there been an award for loss of profits, although one would have expected to see one. He concedes that if his submission in this regard is correct there would have to be a compensatory factor, for the learned judge only awarded interest on the capital expended from 2nd February 1983, when the plaintiffs ceased to carry on the business and sold it. So Mr. Shawcross concedes that if his submission is right, the plaintiff would be entitled to interest on the award for that 3¼ year period. Finally, he submits that even if damages for loss of profit are recoverable, the learned judge assessed the figure at too high a level, and on an incorrect basis. That the measure of damages for the tort of deceit and for breach of contract are different, no longer needs support from -authority. Damages for deceit are not awarded on the basis that the plaintiff is to be put in as good a position as if the statement had been true; they are to be assessed on a basis which would compensate the plaintiff for all the loss he has suffered, so far as money can do it.
This was confirmed in the case of Doyle v. Olby (Ironmongers) Limited, to which both the learned judge and this court were referred; it is reported in [1969] Q.B. Reports at page 158 and was a case in which the facts were similar to those of the present case.
In the course of his judgment Lord Denning M.R. said at page 166:
“The second question is what is the proper measure of damages for fraud, as distinct from damages for breach of contract. It was discussed during the argument in Hadley v. Baxendale (1854) 9 Ex 341), and finds a place in the notes to Smith’s Leading Cases, 13th ed. (1929) at p. 563, where it is suggested there is no difference. But in McConnel v. Wright [1903] 1 Ch. 546, 554, Lord Collins M.R. pointed out the difference. It was an action for fraudulent statements in a prospectus whereby a man was induced to take up shares. Lord Collins said of the action for fraud:
‘It is not an action for breach of contract, and, therefore, no damages in respect of prospective gains which the person contracting was entitled by his contract to expect to come in, but it is an action of tort – it is an action for a wrong done whereby the plaintiff was tricked out of certain money in his pocket, and, therefore, prima facie, the highest limit of his damages is the whole extent of his loss, and that loss is measured by the money which was in his pocket and is now in the pocket of the company.’
But that statement was the subject of comment by Lord Atkin in Clark v. Urguhart [1930] A.C.28, 67-68. He said:
‘I find it difficult to suppose that there is any difference in the measure of damages in an action of deceit depending upon the nature of the transaction into which the plaintiff is fraudulently induced to enter. Whether he buys shares or buys sugar, whether he subscribes for shares, or agrees to enter into a partnership, or in any other way alters his position to his detriment, in principle, the measure of damages should be the same, and whether estimated by a jury or a judge. I should have thought it would be based on the actual damage directly flowing from the fraudulent inducement. The formula in McConnel v. Wright [1903] 1 Ch. 546 may be correct or it may be expressed in too rigid terms.’
I think that Lord Collins did express himself in too rigid terms. He seems to have overlooked consequential damages. On principle the distinction seems to be this: in contract the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say:
‘I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but what is more, I have been put to a large amount of extra expense as well and suffered this or that extra damages.’
All such damages can be recovered: and it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen. For instance, in this very case, Mr. Doyle has not only lost the money which he paid for the business, which he would never have done if there had been no fraud; he put all that money in and lost it; but also he has been put to expense and loss in trying to run a business which has turned out to be a disaster for him. He is entitled to damages for all his loss, subject, of course to giving credit for any benefit that he has received. There is nothing to be taken off in mitigation; for there is nothing more that he could have done to reduce his loss. He did all that he could reasonably be expected to do.”
In the present case it seems to me that the difference can be put in this way. The first defendant did not warrant to the plaintiffs that all the customers with whom he had a professional rapport would remain customers of the salon at Exeter Road. He represented that he would not be continuing to practise as a stylist in the immediate area.
The observations of Lord Denning, to which I have referred, are supported by an earlier judgment of Dixon J., as he then was, in the case of Toteff v. Antonas [1952] 87 Commonwealth Law Reports, a decision of the High Court of Australia. In that case, at page 650, Dixon J. said:
“In an action of deceit a plaintiff is entitled to recover as damages a sum representing the prejudice or disadvantage he has suffered in consequence of his altering his position under the inducement of the fraudulent misrepresentations made by the defendant. When what he has been induced to do is to make a purchase from the defendant and part with his money to him in payment of the price, then, if the transaction stands and is not disaffirmed or rescinded what is recoverable is ‘the difference between the real value of the property, and the sum which the plaintiff was induced to give for it’ per Abbott L.C.J. Pearson v. Wheeler. As Sir James Hannen P. in Peek v. Perry pointed out, the question is how much worse off is the plaintiff than if he had not entered into the transaction. If he had not done so he would have had the purchase money in his pocket. To ascertain his loss you must deduct from the amount he paid the real value of the thing he got. It may be objected that the point of the application of this doctrine lies in identifying ‘the transaction’ and that what Mayo J. has done is to identify it as the purchase of the goodwill and that only. But what is meant is the transaction into which the representation induced the plaintiff to enter. The measure of damages in an action of deceit consists in the loss or expenditure incurred by the plaintiff in consequence of the inducement on which he relied diminished by the corresponding advantage in money or moneys worth obtained by him on the other side: Potts v. Miller. You look to what he has been induced to part with as the initial step. He is entitled to say that but for the fraud he would never have parted with his money; per Coleridge L.C.J. Twycross v. Grant. But he cannot recover the entire price he has paid unless the thing prove wholly worthless. If the thing has any appreciable value the damages must be reduced pro tanto: per Cockburn L.C.J., Twycross v. Grant. It must not be forgotten that after all deceit is an action on the case for special damages incurred in consequence of the defendant’s fraudulent inducement.”
Mr. Shawcross has pointed out that both in the case of Doyle v. Olby and in the case of Toteff v. Antonas, none of the judgments referred to loss of profit as a recoverable head of damage; it may well be that the facts of each of those cases and the period involved before the claims were made, may not have made loss of profit a considerable head of damage. But as to the statements of principle to which I have referred/ it seems to me clear that there is no basis upon which one could say that loss of profits incurred whilst waiting for an opportunity to realise to its best advantage a business which has been purchased, are irrecoverable. It is conceded that losses made in the course of running the business of a company, are recoverable. If in fact the plaintiffs lost the profit which they could reasonably have expected from running a business in the area of a kind similar to the business in this case, I can see no reason why those do not fall within the words of Lord Atkin in Clark v. Urquhart, “actual damage directly flowing from the fraudulent inducement”.
So I consider that on the facts found by the learned judge in the present case, the plaintiffs did establish that they had suffered a loss due to the defendants’ misrepresentation which arose from their inability to earn the profits in the business which they hoped to buy in the Bournemouth area.
I would therefore reject the submission of Mr. Shawcross that loss of profits is not a recoverable head of damage in cases of this kind.”
Leaf v International Galleries
[1950] 2 KB 86
Denning LJ
“The question is whether the plaintiff is entitled to rescind the contract on the ground that the painting in question was not painted by Constable. I emphasize that it is a claim to rescind only: there is no claim in this action for damages for breach of condition or breach of warranty. The claim is simply one for rescission. At a very late stage before the county court judge counsel did ask for leave to amend by claiming damages for breach of warranty, but it was not allowed. No claim for damages is before us at all. The only question is whether the plaintiff is entitled to rescind.
The way in which the case is put by Mr. Weitzman, on behalf of the plaintiff, is this: he says that this was an innocent misrepresentation and that in equity he is, or should be, entitled to claim rescission even of an executed contract of sale on that account. He points out that the judge has found that it is quite possible to restore the parties to their original position. It can be done by simply handing back the picture to the defendants.
In my opinion, this case is to be decided according to the well known principles applicable to the sale of goods. This was a contract for the sale of goods. There was a mistake about the quality of the subject-matter, because both parties believed the picture to be a Constable; and that mistake was in one sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at all about the subject-matter of the sale. It was a specific picture, “Salisbury Cathedral.” The parties were agreed in the same terms on the same subject-matter, and that is sufficient to make a contract: see Solle v Butcher.[1]
There was a term in the contract as to the quality of the subject-matter: namely, as to the person by whom the picture was painted – that it was by Constable. That term of the contract was, according to our terminology, either a condition or a warranty. If it was a condition, the buyer could reject the picture for breach of the condition at any time before he accepted it, or is deemed to have accepted it; whereas, if it was only a warranty, he could not reject it at all but was confined to a claim for damages.
I think it right to assume in the buyer’s favour that this term was a condition, and that, if he had come in proper time he could have rejected the picture; but the right to reject for breach of condition has always been limited by the rule that, once the buyer has accepted, or is deemed to have accepted, the goods in performance of the contract, then he cannot thereafter reject, but is relegated to his claim for damages: see s. 11, sub-s. 1 (c), of the Sale of Goods Act 1893, and Wallis, Son & Wells v Pratt & Haynes.[2]
The circumstances in which a buyer is deemed to have accepted goods in performance of the contract are set out in s. 35 of the Act, which says that the buyer is deemed to have accepted the goods, amongst other things, “when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.” In this case the buyer took the picture into his house and, apparently, hung it there, and five years passed before he intimated any rejection at all. That, I need hardly say, is much more than a reasonable time. It is far too late for him at the end of five years to reject this picture for breach of any condition. His remedy after that length of time is for damages only, a claim which he has not brought before the court.
Is it to be said that the buyer is in any better position by relying on the representation, not as a condition, but as an innocent misrepresentation? I agree that on a contract for the sale of goods an innocent material misrepresentation may, in a proper case, be a ground for rescission even after the contract has been executed…
Although rescission may in some cases be a proper remedy, it is to be remembered that an innocent misrepresentation is much less potent than a breach of condition; and a claim to rescission for innocent misrepresentation must at any rate be barred when a right to reject for breach of condition is barred. A condition is a term of the contract of a most material character, and if a claim to reject on that account is barred, it seems to me a fortiori that a claim to rescission on the ground of innocent misrepresentation is also barred.”
Long v Lloyd
[1958] EWCA Civ 3 [1958] 1 WLR 753, [1958] 2 All ER 402, [1958] WLR 753
Pearce LJ
Mr. Crowther’s argument is founded on the view expressed on this somewhat vexed question by Lord Justice Denning in the comparatively recent cases of Solle v Butcher 1950 1 K.B. 671 at page 695, and Leaf v International Galleries 1950 2 K.B. 86 at page 90.
That view, while accepting so far as it relates to matters of title the well-established principle that rescission of a contract for the sale of land will not be granted after completion on the ground of innocent misrepresentation (see Wilde v Gibson 1 H.L.C., 605, and Brownlie v Campbell 5 A.C. 925, rejects as no longer authoritative Seddon v North Eastern Salt Co Ltd 1 Ch., 326, the well-known case concerning sales of shares, in which Mr. Justice Joyce clearly stated the law to be that the court would not grant rescission of an executed contract for the sale of a chattel or chose in action on the ground of innocent misrepresentation; and involves in the like condemnation Angel v Jay 1911, 1 K.B., 666, in which the same principle was applied to an executed lease.
The learned Lord Justice’s view on this question, which has been ably and persuasively championed before us by Mr. Crowther, is thus expressed in Leaf v International Galleries (supra) at page 90:
“The observations of Mr. Justice Joyce in Sedon v. North Eastern Salt Company Ltd. are, in my opinion, not good law. Many judges have treated it as plain that an executed contract of sale may, in a proper case, be rescinded for innocent misrepresentation: see, for instance, Lord Justice Warrington, and Lord Justice Scrutton, in T. and J. Harrison v. Knowles & Foster; per Lord Atkin in Bell v. Lever Bros. Ltd., per Lord Justice Scrutton and Lord Justice Maugham, in L’Estrange v. F. Graucob Ltd. Apart from that, there is now the decision of the majority of this court in Solle v. Butcher which overrules the first ground of decision in Angel v. Jay.”
In the earlier case of Solle v Butcher (supra), Lord Justice Denning (as he was then) had said that:
“The fact that the lease has been executed is no bar to this relief. No distinction can in this respect be taken between rescission for innocent misrepresentation and rescission for common misapprehension, for many of the common misapprehensions are due to innocent misrepresentation, and Cooper v. Phibbs shows that rescission is available even after an agreement of tenancy has been executed and partly performed. The observations in Seddon v. North Eastern Salt Company, Ltd., have lost all authority since Lord Justice Scrutton threw doubt on them in Lever Bros. Ltd. v. Bell and the Privy Council actually set aside an executed agreement in MacKenzie v. Royal Bank of Canada. If and in so far as Angel v. Jay decided that an executed lease could not be rescinded for an innocent misrepresentation it was, in my opinion, a wrong decision. It would mean that innocent people would be deprived of their right of rescission before they had any opportunity of knowing they had it. I am aware that in Wilde v. Gibson Lord Campbell said that an executed conveyance could be set aside only on the ground of actual fraud, but this must be taken to be confined to misrepresentations as to defects of title on the conveyance of land.”
Lord Justice Denning’s condemnation of Seddon v North Eastern Salt Co Ltd (supra) and Angel v Jay (supra) was by no means fully accepted by the two other members of the court in Leaf v International Galleries (supra). The Master of the Rolls (Lord Evershed) at page 93 said this:
“In the circumstances it is unnecessary, as my brethren have already observed, to express any conclusion on the more general matter whether the so-called doctrine which finds expression in the headnote to Seddon v. North Eastern Salt Company Ltd. ought now to be treated as of full effect and validity. The doubt on that matter is the greater since the observations of the majority of this court in Solle v. Butcher; but out of respect to the argument of Mr. Weitsman and because the matter is one of interest to lawyers … I venture to add some observations which may be relevant when the general application of this doctrine has to be further considered… Finally, I add this. True it is that since the observations of Lord Justice Scrutton in Lever Bros. Ltd. v. Bell and those of this court in Solle v.Butcher much greater doubt may be entertained about the validity of Mr. Justice Joyce’s decision in 1905. The article that Mr. Justice read to us was written eleven years ago. There has been opportunity for Parliament to alter the law if it was thought inadequate. I am not saying that that is a ground on which we should conclude that the so-called doctrine of Seddon v. North Eastern Salt Company Ltd. is well stated or is in all respects correct, but the fact that it has stood for such a length of time, even though qualified, is, I think, another consideration deserving of some weight when this matter has further to be debated and to be adjudicated on.”
At page 91 of the report, Lord Justice Jenkins said:
“So far as dealings in land are concerned there is a considerable body of authority to the effect that rescission on the ground of innocent misrepresentation will not be allowed after conveyance. For instance, there are the observations (1 H.L. Cas. at p. 632) of Lord Campbell to that effect in Wilde v. Gibson, and the doctrine has also been applied to leases in Angel v. Jay. In some of the cases, on the strength of the authorities dealing with sales of land, the proposition has been stated in general terms to the effect that no executed contract can be rescinded after completion on the ground of innocent misrepresentation. As appears from the recent decision of the majority of this court in Solle v. Butcher it seems probable that the proposition thus generally stated is unduly wide. In particular, it cannot be assumed that it necessarily holds good with respect to a sale of chattels passing by delivery. For the purposes of this case, however, I find it unnecessary to decide how far it is possible to obtain, on the ground of innocent misrepresentation, rescission of a contract for the sale of chattels passing by delivery after the contract has been completed by delivery of those chattels, and I propose to confine myself to considering whether, assuming such a claim to be open, this is a case in which it should properly be allowed.”
The question was thus left open in Leaf v International Galleries but the court was unanimous in holding that on the assumption that the innocent misrepresentation did give rise to a right to claim rescission after the contract had been completed such right had in the circumstances of the case been lost by the time that the buyer purported to exercise it.
Mr. Crowther’s able argument has not sufficed to resolve our doubts on the question of principle, but we think that it is unnecessary here, as it was in Leaf’s case, to decide whether the innocent misrepresentation relied on by the plaintiff gave rise to a right to rescission after completion of the contract, because we are satisfied that his right to do so, if it ever existed, had been lost by the time that he purported to reject the lorry.
We should next refer to the facts of Leaf’s case and the observations made by the members of the court on those facts. The contract was a contract for the sale of a picture which the sellers innocently misrepresented to have been painted by Constable. The buyer took delivery of the picture and kept it for a matter of five years. He was then informed on attempting to sell the picture that it was not a Constable. Thereupon he brought his action for rescission on the ground that the sellers had misrepresented, albeit innocently, the identity of the artist. He could have claimed damages for breach of warranty but refrained from doing so.
On these facts Lord Justice Denning after referring to sections 11(1)(c) and 35 of the Sale of Goods Act, 1893, said this at page 90:
“In this case this buyer took the picture into his house, and five years passed before he intimated any rejection. That, I need hardly say, is much more than a reasonable time. It is far too late for him at the end of five years to reject this picture for breach of any condition. His remedy after that length of time is for damages only, a claim which he has not brought before the court … although rescission may in some cases be a proper remedy, nevertheless it is to be remembered that an innocent misrepresentation is much less potent than a breach of condition. A condition is a term of the contract of a most material character, and, if a claim to reject for breach of condition is barred, it seems to me a fortiori that a claim to rescission on the ground of innocent misrepresentation is also barred. So, assuming that a contract for the sale of goods may be rescinded in a proper case for innocent misrepresentation, nevertheless, once the buyer has accepted, or is deemed to have accepted, the goods, the claim is barred. In this case the buyer must clearly be deemed to have accepted the picture. He had ample opportunity to examine it in the first few days after he bought it. Then was the time to see if the condition or representation was fulfilled, yet he has kept it all this time and five years have elapsed without any notice of rejection. In my judgment, he cannot now claim to rescind … “
Lord Justice Jenkins founded himself on the five years’ delay as being far in excess of the reasonable time within which the right to claim rescission, if it ever existed, should have been exercised; and while expressing no dissent from, did not advert to, Lord Justice Denning’s view to the effect that the buyer’s acceptance of the picture in itself any right there might otherwise have been to claim rescission.
The Master of the Rolls (Lord Evershed ) at page 93 said:
“I also agree that this appeal should be dismissed, for the reasons which have already been given. On the facts of this case it seems to me that the buyer ought not now to be allowed to rescind this contract … ” and a page 94 he said ” If a man elects to buy a work of art or any other chattel on the faith of some representation, innocently made, and delivery of the article is accepted, then it seems to me that there is much to be said for the view that on acceptance there is an end of that particular transaction, and that, if it were otherwise, business dealings in these things would become hazardous, difficult, and uncertain.”
As to the facts of the present case, Mr. Crowther contrasts the period of only a few days between the delivery of the lorry to the plaintiff and his purported rescission of the contract with the period of five years in Leaf’s case. He says the plaintiff was entitled to a reasonable time within which to ascertain the true condition of the lorry and to exercise (if so advised) the right of rescission which for the present purpose he must be assumed to have had. It is of course obvious that so far as time is concerned this case bears no resemblance to Leaf’s case.
Nevertheless, a strict application to the facts of the present case of Lord Justice Denning’s view to the effect that the right (if any) to rescind after completion on the ground of innocent misrepresentation is barred by acceptance of the goods must necessarily prove fatal to the plaintiff’s case. Apart from special circumstances, the place of delivery is the proper place for examination and for acceptance. It was open to the plaintiff to have the lorry examined by an expert before driving it away but he chose not to do so. It is true, however, that the truth of certain of the representations, for example, that the lorry would do eleven miles to the gallon could not be ascertained except by user and therefore the plaintiff should have a reasonable time to test it. Until he had had such an opportunity it might well be said that he had not accepted the lorry, always assuming, of course, that he did nothing inconsistent with the ownership of the seller. An examination of the facts, however, shows that on any view he must have accepted the lorry before he purported to reject it.
Thus, to recapitulate the facts, after the trial run the plaintiff drove the lorry home from Hampton Court to Sevenoaks, a not inconsiderable distance. After that experience he took it into use in his business by driving it on the following day to Rochester and back to Sevenoaks with a load. By the time he returned from Rochester he knew that the dynamo was not charging, that there was an oil seal leaking, that he had used 8 gallons of fuel for a journey of 40 miles and that a wheel was cracked. He must also, as we think, have known by this time that the vehicle was not capable of 40 miles per hour. As to oil consumption, we should have thought that, if it was so excessive that the sump was practically dry after 300 miles, the plaintiff could have reasonably been expected to discover that the rate of consumption was unduly high by the time he had made the journey from Hampton Court to Sevenoaks and thence to Rochester and back.
On his return from Rochester the plaintiff telephoned to the defendant and complained about the dynamo, the excessive fuel consumption, the leaking oil seal and the cracked wheel. The defendant then offered to pay half the cost of the reconstructed dynamo which the plaintiff had been advised to fit, and the plaintiff accepted the defendant’s offer. We find this difficult to reconcile with the continuance of any right of rescission which the plaintiff might have had down to that time.
But the matter does not rest there. On the following day the plaintiff, knowing all that he did about the condition and performance of the lorry, despatched it, driven by his brother, on a business trip to Middlesbrough. That step, at all events, appears to us to have amounted, in all the circumstances of the case, to a final acceptance of the lorry by the plaintiff for better or for worse, and to have conclusively extinguished any right of rescission remaining to the plaintiff after completion of the sale.
Accordingly, even if the plaintiff should be held, notwithstanding Seddon v North Eastern Salt Co Ltd, (supra), to have had a right to rescission which survived the completion of the contract, we think that on the facts of this case he lost any such right before his purported exercise of it.
For these reasons we would dismiss this appeal.
Royscot Trust Ltd v Rogerson
[1991] EWCA Civ 12
Balcombe LJ
“The first main issue before us was: accepting that the tortious measure is the right measure, is it the measure where the tort is that of fraudulent misrepresentation, or is it the measure where the tort is negligence at common law? The difference is that in cases of fraud a plaintiff is entitled to any loss which flowed from the defendant’s fraud, even if the loss could not have been foreseen: see Doyle v Olby (Ironmongers) Ltd [1969] 2 Q.B. 158 . In my judgment the wording of the subsection is clear: the person making the innocent misrepresentation shall be “so liable,” i.e., liable to damages as if the representation had been made fraudulently. This was the conclusion to which Walton J. came in F. & B. Entertainments Ltd. v. Leisure Enterprises Ltd. (1976) 240 E.G. 455 , 461. See also the decision of Sir Douglas Frank Q.C., sitting as a High Court judge, in McNally v. Welltrade International Ltd. [1978] I.R.L.R. 497 . In each of these cases the judge held that the basis for the assessment of damages under section 2(1) of the Act of 1967 is that established in Doyle v Olby (Ironmongers) Ltd This is also the effect of the judgment of Eveleigh L.J. in Chesneau v. Interhome Ltd. already cited: “By ‘so liable’ I take it to mean liable as he would be if the misrepresentation had been made fraudulently.”
This was also the original view of the academic writers. In an article, “The Misrepresentation Act 1967” (1967) 30 Modern Law Review 369 by P. S. Atiyah and G. H. Treitel, the authors say, at pp. 373-374:
“The measure of damages in the statutory action will apparently be that in an action of deceit… But more probably the damages recoverable in the new action are the same as those recoverable in an action of deceit…”
Professor Treitel has since changed his view. In Treitel, The Law of Contract, 7th ed. (1987), p. 278, he says:
“Where the action is brought under section 2(1) of the Misrepresentation Act , one possible view is that the deceit rule will be applied by virtue of the fiction of fraud. But the preferable view is that the severity of the deceit rule can only be justified in cases of actual fraud and that remoteness under section 2(1) should depend, as in actions based on negligence, on the test of foreseeability.”
The only authority cited in support of the “preferable” view is Shepheard v. Broome [1904] A.C. 342 , a case under section 38 of the Companies Act 1867, which provided that in certain circumstances a company director, although not in fact fraudulent, should be “deemed to be fraudulent.” As Lord Lindley said, at p. 346: “To be compelled by Act of Parliament to treat an honest man as if he were fraudulent is at all times painful,” but he went on to say:
“but the repugnance which is naturally felt against being compelled to do so will not justify your Lordships in refusing to hold the appellant responsible for acts for which an Act of Parliament clearly declares he is to be held liable.”
The House of Lords so held.
It seems to me that that case, far from supporting Professor Treitel’s view, is authority for the proposition that we must follow the literal wording of section 2(1), even though that has the effect of treating, so far as the measure of damages is concerned, an innocent person as if he were fraudulent. Chitty on Contracts, 26th ed. (1989), vol. 1, p. 293, para. 439, says:
“it is doubtful whether the rule that the plaintiff may recover even unforeseeable losses suffered as the result of fraud would be applied; it is an exceptional rule which is probably justified only in cases of actual fraud.”
No authority is cited in support of that proposition save a reference to the passage in Professor Treitel’s book cited above.
Professor Furmston in Cheshire, Fifoot and Furmston’s Law of Contract , 11th ed. (1986), p. 286, says:
“It has been suggested” – and the reference is to the passage in Atiyah and Treitel’s article cited above – “that damages under section 2(1) should be calculated on the same principles as govern the tort of deceit. This suggestion is based on a theory that section 2(1) is based on a ‘fiction of fraud.’ We have already suggested that this theory is misconceived. On the other hand the action created by section 2(1) does look much more like an action in tort than one in contract and it is suggested that the rules for negligence are the natural ones to apply.”
The suggestion that the “fiction of fraud” theory is misconceived occurs at p. 271, in a passage which includes:
“Though it would be quixotic to defend the drafting of the section, it is suggested that there is no such ‘fiction of fraud’ since the section does not say that a negligent misrepresentor shall be treated for all purposes as if he were fraudulent. No doubt the wording seeks to incorporate by reference some of the rules relating to fraud but, for instance, nothing in the wording of the subsection requires the measure of damages for deceit to be applied to the statutory action.”
With all respect to the various learned authors whose works I have cited above, it seems to me that to suggest that a different measure of damage applies to an action for innocent misrepresentation under the section than that which applies to an action for fraudulent misrepresentation (deceit) at common law is to ignore the plain words of the subsection and is inconsistent with the cases to which I have referred. In my judgment, therefore, the finance company is entitled to recover from the dealer all the losses which it suffered as a result of its entering into the agreements with the dealer and the customer, even if those losses were unforeseeable, provided that they were not otherwise too remote.
If the question of foreseeability had been the only issue in this appeal, the judgment so far would have rendered it unnecessary to decide whether, in the circumstances of the present case, the wrongful sale of the car by the customer was reasonably foreseeable by the dealer. Since the judge did not expressly deal with this point in his judgment, it might have been preferable that we should not do so. Nevertheless there is a separate issue whether the wrongful sale of the car was novus actus interveniens and thus broke the chain of causation, and the reasonable foreseeability of the event in question is a factor to be taken into account on that issue. Accordingly, it is necessary to deal with this matter. Mr. Kennedy, for the dealer, submitted that while a motor car dealer might be expected to foresee that a customer who buys a car on hire-purchase may default in payment of his instalments, he cannot be expected to foresee that he will wrongfully dispose of the car. He went on to submit that, in the particular circumstances of this case, where the customer was apparently reputable, being a young married man in employment, it was even less likely that the dealer could have foreseen what might happen. There appears to have been no oral evidence directed to this particular point.
In my judgment this is to ignore both the reality of the transaction and general experience. While in legal theory the car remains the property of the finance company until the last hire-purchase instalment is paid, in practice the purchaser is placed in effective control of the car and treats it as his own. Further, there have been so many cases, both civil and criminal, where persons buying a car on hire-purchase have wrongfully disposed of the car, that we can take judicial notice that this is an all too frequent occurrence. Accordingly I am satisfied that, at the time when the finance company entered into the agreements with the dealer and the customer, it was reasonably foreseeable that the customer might wrongfully sell the car.
Mr. Kennedy’s next submission was that the customer’s wrongful sale of the car was novus actus interveniens. This issue was considered by the judge, although the brief note of his judgment on this point is corrupt and is not agreed by counsel. It is implicit in his decision to award £1,600 damages to the finance company that the sale was not novus actus interveniens; otherwise on the figures in this case he would have been bound to find that the finance company had suffered no loss. However, the judgment contains no indication of how he came to that conclusion.
In the present case the customer was a free agent and his act in selling the car was unlawful. Nevertheless neither of these facts is conclusive in determining whether the sale of the car was a novus actus sufficient to break the chain of causation: see generally Clerk & Lindsell on Torts, 16th ed. (1989), pp. 81-86, paras. 1-117 to 1-121 and McGregor on Damages , 15th ed. (1988), pp. 92-94, paras. 152-156. However, if the dealer should reasonably have foreseen the possibility of the wrongful sale of the car, then that is a strong indication that the sale did not break the chain of causation. As Winn L.J. said in Iron and Steel Holding and Realisation Agency v. Compensation Appeal Tribunal [1966] 1 W.L.R. 480, 492:
“In my opinion, wherever any intervening factor was itself foreseen or reasonably foreseeable by the actor, the person responsible for the act which initiated the chain of causes leading to the final result, that intervening cause is not itself, in the legal sense, a novus actus interveniens breaking the chain of causation and isolating the initial act from the final result.”
I doubt whether further citation of authority will be helpful; in this field authority is almost too plentiful. For the reasons I have already given, in my judgment the dealer should reasonably have foreseen the possibility that the customer might wrongfully sell the car. In my judgment, therefore, the sale was not novus actus interveniens and did not break the chain of causation.
Mr. Kennedy’s final submission was that the normal rule is that the plaintiff’s loss must be assessed as at the date of his reliance upon the misrepresentation; since the finance company paid £6,400 to the dealer and in return acquired title to a car which was worth at least that sum, its loss assessed at that date was nil. This submission again falls into the error of treating the transaction according to its technicalities – that the finance company was interested in purchasing the car. That was not the reality: the finance company was interested in receiving the totality of the instalments from the customer. Once the transaction is looked at in this way the authorities on which Mr. Kennedy relied to support this submission, being all concerned with misrepresentations leading to the acquisition of chattels, can be seen to be of little assistance. But even in such a case the rule is not a hard and fast one – see the recent case of Naughton v. O’Callaghan [1990] 3 All E.R. 191. So I reject this submission also.
Accordingly, I would dismiss the dealer’s appeal. I would allow the finance company’s cross-appeal, set aside the judgment of 22 February 1990, and direct that in its place judgment be entered for the finance company against the dealer in the sum of £3,625·24 together with interest. The finance company accepts that it will have to give credit for any sums that it may receive from its judgment against the customer.”
Smith New Court Securities v. Scrimgeour Vickers
[1996] UKHL 3; [1997] AC 254; [1996] 4 All ER 769; [1996] 3 WLR 1051
Lord Browne-Wilkinson
Doyle v. Olby (Ironmongers) Ltd. establishes four points. First, that the measure of damages where a contract has been induced by fraudulent misrepresentation is reparation for all the actual damage directly flowing from (i.e. caused by) entering into the transaction. Second, that in assessing such damages it is not an inflexible rule that the plaintiff must bring into account the value as at the transaction date of the asset acquired: although the point is not adverted to in the judgments, the basis on which the damages were computed shows that there can be circumstances in which it is proper to require a defendant only to bring into account the actual proceeds of the asset provided that he has acted reasonably in retaining it. Third, damages for deceit are not limited to those which were reasonably foreseeable. Fourth, the damages recoverable can include consequential loss suffered by reason of having acquired the asset.
In my judgment Doyle v. Olby (Ironmongers) Ltd. was rightly decided on all these points. It is true, as to the second point, that there were not apparently cited to the Court of Appeal the 19th century cases which established the “inflexible rule” that the asset acquired has to be valued as at the transaction date: the successful appellant was not legally represented. But in my judgment the decision on this second point is correct. The old “inflexible rule” is both wrong in principle and capable of producing manifest injustice. The defendant’s fraud may have an effect continuing after the transaction is completed, e.g. if a sale of gold shares was induced by a misrepresentation that a new find had been made which was to be announced later it would plainly be wrong to assume that the plaintiff should have sold the shares before the announcement should have been made. Again, the acquisition of the asset may, as in Doyle v. Olby (Ironmongers) Ltd. itself, lock the purchaser into continuing to hold the asset until he can effect a resale. To say that in such a case the plaintiff has obtained the value of the asset as at the transaction date and must therefore bring it into account flies in the face of common sense: how can he be said to have received such a value if, despite his efforts, he has been unable to sell.
Doyle v. Olby (Ironmongers) Ltd. has subsequently been approved and followed by the Court of Appeal in East v. Maurer [1991] 1 WLR 461 and Downs v. Chappell [1996] 3 All ER 344. In both cases the plaintiffs had purchased a business as a going concern in reliance on the defendant’s fraudulent misrepresentation. In each case after discovery of the fraud they sold the business at a loss and recovered by way of damages the difference between the original purchase price and the price eventually realised on a resale, i.e. the old date of transaction rule was not applied. In Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1996] 3 WLR 87 your Lordships treated the measure of damages for fraud as being in a special category regulated by the principles of Doyle v. Olby (Ironmongers) Ltd.
Turning for a moment away from damages for deceit, the general rule in other areas of the law has been that damages are to be assessed as at the date the wrong was committed. But recent decisions have emphasised that this is only a general rule: where it is necessary in order adequately to compensate the plaintiff for the damage suffered by reason of the defendant’s wrong a different date of assessment can be selected. Thus in the law of contract, the date of breach rule “is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances:” per Lord Wilberforce in Johnson v. Agnew [1980] A.C. 367, at 401A. Similar flexibility applies in assessing damages for conversion (I.B.L. Ltd. v. Coussens [1991] 2 All E.R. 133) or for negligence (Dodd Properties Ltd. v. Canterbury City Council [1980] 1 WLR 433). As Bingham L.J. (as he then was) said in County Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916, 925-926:
“While the general rule undoubtedly is that damages for tort or breach of contract are assessed at the date of the breach . . . this rule also should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule.”
In the light of these authorities the old 19th century cases can no longer be treated as laying down a strict and inflexible rule. In many cases, even in deceit, it will be appropriate to value the asset acquired as at the transaction date if that truly reflects the value of what the plaintiff has obtained. Thus, if the asset acquired is a readily marketable asset and there is no special feature (such as a continuing misrepresentation or the purchaser being locked into a business that he has acquired) the transaction date rule may well produce a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him, freed from any continuing adverse impact of the defendant’s wrongful act. The transaction date rule has one manifest advantage, namely that it avoids any question of causation. One of the difficulties of either valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is that difficult questions of causation are bound to arise. In the period between the transaction date and the date of valuation or resale other factors will have influenced the value or resale price of the asset. It was the desire to avoid these difficulties of causation which led to the adoption of the transaction date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresentation there are likely to be many cases where the general rule has to be departed from in order to give adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to influence the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired.
Finally, it must be emphasised that the principle in Doyle v. Olby (Ironmongers) Ltd. [1969] 2 QB 158, strict though it is, still requires the plaintiff to mitigate his loss once he is aware of the fraud. So long as he is not aware of the fraud, no question of a duty to mitigate can arise. But once the fraud has been discovered, if the plaintiff is not locked into the asset and the fraud has ceased to operate on his mind, a failure to take reasonable steps to sell the property may constitute a failure to mitigate his loss requiring him to bring the value of the property into account as at the date when he discovered the fraud or shortly thereafter.
In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property:
1. The defendant is bound to make reparation for all the damage directly flowing from the transaction;
2. Although such damage need not have been foreseeable, it must have been directly caused by the transaction;
3. In assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction;
4. As a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered;
5. Although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property.
6. In addition, the plaintiff is entitled to recover consequential losses caused by the transaction;
7. The plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.
Before seeking to apply those principles to the present case, there are two points I must make. First, in Downs v. Chappell [1996] 3 All ER 344, 361, Hobhouse L.J. having quantified the recoverable damage very much along the lines that I have suggested, sought to cross-check his result by looking to see what the value of the business would have been if the misrepresentations had been true and then comparing that value to the contract price. Whilst Hobhouse L.J. accepted that this was not the correct measure of damages, he was seeking to check that the plaintiff was not being compensated for a general fall in market prices (for which the defendant was not accountable) rather than for the wrong done to him by the defendant. In my view, such a cross-check is not likely to be helpful and is conducive to over-elaboration both in the evidence and in argument. Second, in Royscot Trust Ltd. v. Rogerson [1991] 2 QB 297 the Doyle v. Olby (Ironmongers) Ltd. measure of damages was adopted in assessing damages for innocent misrepresentation under the Misrepresentation Act, 1967. I express no view on the correctness of that decision.
….
For these reasons I would hold that the damages recoverable amount to £11,352,220 being the difference between the contract price and the amount actually realised by Smith on the resale of the shares. However, as there was no appeal by Smith against the judge’s assessment of the damages at £10,764,005, Smith’s claim must be limited to that latter amount. I would therefore allow the appeal and restore the judge’s order.
William Sindall Plc v Cambridgeshire County Council
[1993] EWCA Civ 14 [1994] 3 All ER 932, [1994] WLR 1016, [1994] 1 WLR 1016
Lord Hoffmann
5. Discretion.
My conclusion that there are no grounds for rescission, either for misrepresentation or mistake, means that it is unnecessary to consider whether the judge correctly exercised his discretion under Section 2(2) of the Misrepresentation Act 1967 not to award damages in lieu of rescission. But in case this case goes further, I should say that in my judgment the judge approached this question on a false basis, arising from his mistake about the seriousness of the defect. This vitiated the exercise of the discretion and would have made it necessary, if we thought that Sindall would otherwise have been entitled to rescind for misrepresentation, to exercise our own discretion under Section 2(2).
The section reads as follows:
“Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be, or has been, rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.”
This provision was adopted as a result of the Tenth Report of the Law Reform Committee, (1962) Cmnd. 1782, which also recommended abolishing the bar on rescission after completion. The relevant paragraphs of the Report were 11 and 12:
“11. A more fundamental objection which may be advanced against our recommendation [to abolish the bar on rescission after completion] concerns the drastic character of the remedy to which the plaintiff would be entitled. Unless the court’s power to grant rescission is made more elastic than it is at present, the court will not be able to take account of the relative importance or unimportance of the facts which have been misrepresented. A car might be returned to the vendor because of a misrepresentation about the mileage done since the engine was last overhauled, or a transfer of shares rescinded on account of an incorrect statement about the right to receive the current dividend. In some cases the result could be as harsh on the representor as the absence of a right to rescind under the current law can be on the representee. Moreover, the conflict between remedies for misrepresentation and those for breach of contract would be aggravated. There is already the anomaly that a statement embodied in the contract and constituting a minor term of it is treated as a warranty, the breach of which gives only a right to damages, whereas the same statement as a representation inducing the contract enables the latter to be rescinded. Before the contract is executed and at a time when the parties can be relatively easily restored to their original positions, this anomaly may not matter very much, but the position would be very different if the court had no option but to order rescission after the contract had been executed.
12. To meet these objections we recommend that wherever the court has power to order rescission it should, as an alternative, have a discretionary power to award damages if it is satisfied that these would afford adequate compensation to the plaintiff, having regard to the nature of the misrepresentation, and the fact that the injury suffered by the plaintiff is small compared with what rescission would involve. The courts were given power to award damages in addition to or in substitution for an injunction or a decree of specific performance by Section 2 of Lord Cairns’ Act (the Chancery Procedure Amendment Act 1858) and since the decision of the House of Lords in Leeds Industrial Co operative Society Limited v. Slack [1924] AC 851, the power has been exercised on principles similar to those we have just mentioned.”
The discretion conferred by Section 2(2) is a broad one, to do what is equitable. But there are three matters to which the court must in particular have regard.
The first is the nature of the misrepresentation. It is clear from the Law Reform Committee’s Report that the court was meant to consider the importance of the representation in relation to the subject matter of the transaction. I have already said that in my view, in the context of a #5 million sale of land, a misrepresentation which would have cost #18,000 to put right and was unlikely seriously to have interfered with the development or re sale of the property was a matter of relatively minor importance.
The second matter to which the court must have regard is “the loss that would be caused by it (sc. the misrepresentation) if the contract were upheld.” The section speaks in terms of loss suffered rather than damages recoverable, but clearly contemplates that if the contract is upheld such loss will be compensated by an award of damages. Section 2(2) therefore gives a power to award damages in circumstances in which no damages would previously have been recoverable. Furthermore, such damages will be compensation for loss caused by the misrepresentation, whether it was negligent or not. This is made clear by Section 2(3), which reads as follows:
“Damages may be awarded under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under sub section (2) shall be taken into account in assessing his liability under the said sub section (1).”
Damages under Section 2(2) are therefore damages for the misrepresentation as such. What would be the measure of such damages? This court is not directly concerned with quantum, which would be determined at an inquiry. But since the court, in the exercise of its discretion, needs to know whether damages under Section 2(2) would be an adequate remedy and to be able to compare such damages with the loss which rescission would cause to Cambridgeshire, it is necessary to decide in principle how the damages would be calculated.
The Law Reform Committee drew the analogy with Lord Cairns’ Act and in some respects this analogy is a good one. But it breaks down when one comes to decide the measure of damages. Under Lord Cairns’ Act, the plaintiff who is refused specific performance or an injunction is left to his damages in contract or tort. The measure of such damages is exactly what it would be at common law (see Johnson v. Agnew [1980] AC 367, 400). The only change made by the Act was to give a remedy for purely equitable rights, such as breach of a restrictive covenant to which the plaintiff was not a party. But in such cases the common law analogy enabled a suitable measure of damages to be devised. Section 2(2), on the other hand, creates a power to award damages in a wholly new situation.
Under Section 2(1), the measure of damages is the same as for fraudulent misrepresentation i.e. all loss caused by the plaintiff having been induced to enter into the contract ( Cemp Properties (UK) Ltd v. Dentsply Research and Development Corporation [1991] 2 EGLR 197). This means that the misrepresentor is invariably deprived of the benefit of the bargain (e.g. any difference between the price paid and the value of the thing sold) and may have to pay additional damages for consequential loss suffered by the representee on account of having entered into the contract. In my judgment, however, it is clear that this will not necessarily be the measure of damages under Section 2(2).
First, section 2(1) provides for damages to be awarded to a person who “has entered into a contract after a misrepresentation has been made to him by another party and as a result thereof (sc. of having entered into the contract) he has suffered loss.” In contrast Section 2(2) speaks of “the loss which would be caused by it
(sc. the misrepresentation) if the contract were upheld.” In my view, Section 2(1) is concerned with the damage flowing from having entered into the contract, while Section 2(2) is concerned with damage caused by the property not being what it was represented to be.
Secondly, Section 2(3) contemplates that damages under Section 2(2) may be less than damages under Section 2(1) and should be taken into account when assessing damages under the latter sub section. This only makes sense if the measure of damages may be different.
Thirdly, the Law Reform Committee Report makes it clear that Section 2(2) was enacted because it was thought that it might be a hardship to the representor to be deprived of the whole benefit of the bargain on account of a minor misrepresentation. It could not possibly have intended the damages in lieu to be assessed on a principle which would invariably have the same effect.
The Law Reform Committee drew attention to the anomaly which already existed by which a minor misrepresentation gave rise to a right of rescission whereas a warranty in the same terms would have grounded no more than a claim for modest damages. It said that this anomaly would be exaggerated if its recommendation for abolition of the bar on rescission after completion were to be implemented. I think that Section 2(2) was intended to give the court a power to eliminate this anomaly by upholding the contract and compensating the plaintiff for the loss he has suffered on account of the property not having been what it was represented to be. In other words, damages under Section 2(2) should never exceed the sum which would have been awarded if the representation had been a warranty. It is not necessary for present purposes to discuss the circumstances in which they may be less.
If one looks at the matter when Sindall purported to rescind, the loss which would be caused if the contract were upheld was relatively small: the #18,000 it would have cost to divert the sewer, the loss of a plot and interest charges on any consequent delay at the rate of #2,000 a day. If one looks at the matter at the date of trial, the loss would have been nil because the sewer had been diverted.
The third matter to be taken into account under Section 2(2) is the loss which would be caused to Cambridgeshire by rescission. This is the loss of the bargain at the top of the market (compare The Lucy [1983] 1 Lloyd’s LR 188): having to return about #8 million in purchase price and interest in exchange for land worth less than #2 million.
Having regard to these matters, and in particular the gross disparity between the loss which would be caused to Sindall by the misrepresentation and the loss which would be caused to Cambridgeshrie by rescission, I would have exercised my discretion to award damages in lieu of rescission.
Sindall, of course, claimed to be entitled to damages under Section 2(1) on the grounds that all of some of the alleged misrepresentations were negligent. If Sindall were to succeed on this point, it might be able to establish on the inquiry as to damages that it was entitled not merely to the difference between price and market value at the date of contract, but to the subsequent drop in market value as well. In that case, the award of damages will put Sindall in much the same position as if its rescission and taken effect. But I do not think that the possibility of this result should be anticipated by refusing to exercise the discretion under Section 2(2).
Evans LJ
Misrepresentation
I entirely agree with the judgment of Lord Justice Hoffmann, and it is unnecessary for me to repeat any of its contents here. I add only one footnote with regard to the definition of the County Council’s knowledge for the purposes of its answer to Enquiry No. 7. It was not suggested that the responsible officers had any personal knowledge of the existence of the sewer and of the City’s easement in 1988/89 when the representation was made and the land was conveyed, nor of the exchanges which took place between the City and the old County Council, Cambridge and Ely, between 1970 and 1974. The question is not, however, whether these individuals knew but whether “the Vendor”, meaning the Council, did. If, contrary to our view, Cambridge and Ely was not the predecessor in title of the defendants, and “the Vendor” therefore includes the old Council, then the answer to Enquiry No. 7 was tantamount to saying that the County Council was not aware in 1989 of facts which certainly were known to it in 1974. I should not like our decision in this case to be taken as approving either corporate forgetfulness or collective amnesia of this sort. Applied in the case of a commercial organisation, and with regard to corporate knowledge, questions as to the adequacy of records etc. might well arise. But these questions do not arise here, because Mr. Sher for the respondents accepts that the judge stated the correct test in law for the purposes of the present case: (Judgment, page 66):
“In approaching the present case what I get from the authorities is this, that knowledge may go beyond what is in somebody’s head, that it requires a solicitor to read his file and to read it properly and to make (because his side has the advantage in terms of knowledge) reasonable and prudent investigation of the grounds upon which any belief is stated. This is, of course, of the greatest importance where the vendor is, as here, a corporate body with changing staff. Very little is likely to be in anybody’s head at the critical time. Perhaps one could say that in these sort of circumstances there are three possible types of information: (a) information in somebody’s personal memory, (b) information which is in the files, and which the reasonable and proper investigations of a conveyancing solicitor when preparing his title for sale will reveal, and (c) other information which was either in an individual’s memory and has been forgotten, or is in a file which the ordinary and prudent conveyancer’s inquiries will not reveal. Of these I consider that (a) and (b) will amount to knowledge for the purpose of the answer under consideration and (c) does not.”
This sets the stage for the further analysis in Hoffmann LJ’s judgment, and as stated above I respectfully agree with his reasoning and conclusions in the circumstances of this case.
Equitable mistake
Logically, there remains the question whether the contract, notwithstanding that on its true construction it covers the situation which has arisen, and that it cannot be set aside for misrepresentation, nevertheless may be rescinded on the ground of equitable mistake, as defined by Denning LJ in Solle v. Butcher [1950] 1 KB 671, 692. It must be assumed, I think, that there is a category of mistake which is “fundamental” so as to permit the equitable remedy of rescission, which is wider than the kind of “serious and radical” mistake which means that the agreement is void and of no effect in law: see Chitty on Contracts (26th edition) Volume 1, paragraph 401; Treitel, The Law of Contract (8th edition) page 276; and Cheshire Fifoot and Furmston’s Law of Contract (11th edition) page 245). The difference may be that the common law rule is limited to mistakes with regard to the subject matter of the contract, whilst equity can have regard to a wider and perhaps unlimited category of “fundamental” mistake. However that may be, I am satisfied that the learned Judge’s finding in the present case was vitiated by his assumption that the presence of the sewer and of the City’s easement had serious consequences for the proposed development, even if the sewer was incorporated into the public sewer that was envisaged for the development itself (Option 2A). This would not involve the loss of seven houses and three flats, as the judge appears to have thought (Judgment, page 32), but, at most, of one three bedroomed house. The additional cost of the alterations to the sewer would not have exceeded about #20,000. Given the breadth of the contract terms, in particular Condition No. 14, which on its face was intended to cover precisely such a situation as this, and the relatively minor consequences of the discovery of the sewer, even if some period of delay as well as additional cost was involved, it is impossible to hold, in my judgment, that there is scope for rescission here.
Rescission or damages
Our finding that the builders are not, and were not, entitled to rescind the contract, as they purported to do, makes it unnecessary for us to decide the issue raised under section 2(2) of the Misrepresentation Act 1967, that is, whether in the present case it would be “equitable”, notwithstanding the actionable misrepresentation, “to declare the contract subsisting and award damages in lieu of rescission.” The issue, however, was argued before us (though Mr. Etherton QC was not called upon to reply) and like Hoffmann LJ I consider that if it had been necessary for us to review the learned Judge’s exercise of the discretion, then we would have been; indeed, bound, to do so.
Section 2(3) makes it clear that the statutory power to award damages under section 2(2) is distinct from the plaintiff’s right to recover damages under section 2(1). Quoting from section 2(2) itself, such damages are awarded “in lieu of rescission” and the court has to have regard to three factors in particular, namely, the nature of the misrepresentation, the loss that would be caused by it (sc the misrepresentation) if the contract were upheld, and the loss that rescission would cause to the other party (sc the non fraudulent author of the misrepresentation).
It has not been suggested that these three are the only factors which the court may take into account. The discretion is expressed in broad terms “If of opinion that it would be equitable to do so.” The three factors, however, in all but an exceptional case, are likely to be the ones to which most weight would be given, even if the sub section was silent in this respect.
No real difficulty arises in the present case as regards the nature of the misrepresentation, if any was made, nor as regards the loss which would be caused to the Council, if rescission was upheld. There was no blameworthiness, on the judge’s findings, so far as the Council’s officers in 1988/89 were concerned. The fault, if there was any, lay in their predecessors’ failure to note the title deeds in 1970. The consequences of the misrepresentation were not negligible, but they were small in relation to the purchase and the project as a whole. The loss caused to the Council by rescission would be very great. They would repay in excess of #5 million, together with interest, and would have restored to them land worth only a fraction of that amount. In other words, they would suffer the decline in market values which has occurred since 1988. And, even if the easement had been discovered immediately and the contract had been rescinded then, the Council would have suffered significant loss, simply by reason of the need to repeat the tendering process and find another buyer.
There is, however, much room for debate as to the “loss that would be caused if the contract were upheld.” The sub section assumes, as I read it, that this loss will be compensated by the damages awarded, if the contract is upheld. But if the measure is the same as those awarded in respect of a fraudulent misrepresentation (Doyle v. Olby Ltd [1969] 2 QB 158), or under section 2(1) (Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297), in cases where the contract continues in force, then two consequences seem to follow. First, damages under section 2(2) are co extensive with those under section 2(1), whereas section 2(3) suggests that they are, or may be, different. Secondly, an innocent and non negligent defendant will be liable under section 2(2) for damages which he is specifically excused under section 2(1). Furthermore, if the plaintiff recovers full compensation under section 2(2), if the contract is upheld, then he will not suffer any net loss, assuming that the damages are paid.
The cost of remedying the defect in the land was almost insignificant, and any delay and inconvenience suffered by the builders can be compensated by a relatively small additional sum. The real issue is whether account should be taken of the decline in market values which affects the builders if the contract stands, just as it would affect the Council if rescission was upheld.
Mr. Sher asserts that the builders would not have entered into this contract, nor would they have purchased any other developed land if the existence of the sewer had not been concealed from them. I will assume that this is correct and a fair reflection of the evidence, although I should also express my doubts. The builders went to great lengths to make the purchase. They commenced judicial review proceedings in order to assert their right to buy, and they knowingly paid a price equivalent to the highest which the tendering process had produced; substantially higher, in fact, than had emerged from the initial round. To say that they would have been deterred at that stage from surmounting the obstacle presented by the sewer seems to make a major assumption in their favour. Nevertheless, I will make it in order to consider the issue which Mr. Sher has addressed.
His argument is that the builders are entitled to recover the whole of the loss which they have suffered as a result of entering into the transaction, including the fall in market values from 1988 until at least the time of purported rescission in December 1990. The judgments in Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297
appear to be against this submission, even as regards a claim under section 2(1), because there the judge had found that the buyers, but for the misrepresentation, would not have purchased the property (page 199K), and the Court of Appeal, without altering that finding, held that the measure of damages was the difference between market values (per Bingham LJ at 201G), or the difference between the contract price and the actual market value (Per Sir Nicolas Browne Wilkinson V.C. at 200J), in both cases as the time when the contract was made.
If that applies in the present case, then the builders cannot include the subsequent decline in market values in their loss. But it may be said that the case should be distinguished from the present because no claim for rescission was involved. (See page 198B). I therefore proceed to consider as a matter of principle whether the builders are entitled to contend that the decline in market value forms part of their loss caused by the alleged misrepresentation for the purposes of section 2(2), upon the factual assumption that Mr. Sher has invited us to make.
In my judgment, it is not correct that the measure of damages under section 2(2) for the loss that would be caused by the misrepresentation if the contract were upheld is the same measure as under section 2(1). The latter is established by the common law, and it is the amount required to compensate the party to whom the misrepresentation was made for all the losses which he was sustained by reason of his acting upon it at the time when he did. But the damages contemplated by section 2(2) are damages in lieu of rescission. The starting point for the application of the subsection is the situation where a plaintiff has established a right to rescind the contract on grounds of innocent misrepresentation; its object is to ameliorate for the innocent misrepresentor the harsh consequences of rescission for a wholly innocent (meaning, non negligent as well as non fraudulent) misrepresentor, in a case where it is fairer to uphold the contract and award damages against him. Such an award of damages was not permitted in law or equity before 1967. The court, therefore, exercises a statutory jurisdiction, and it does so having regard to the circumstances at the date of the hearing, when otherwise rescission would be ordered. (The subsection envisages that the court’s order may restore a contract which has been lawfully rescinded by the innocent party at some earlier date (see The Lucy [1983 1 Lloyd’s LR 188, 202. per Mustill J.) When there has been a decline in market values since the date of the contract, then one party or the other will suffer that loss, depending on whether rescission is ordered or not. But that loss is not caused by the misrepresentation, except in the sense that the decline has occurred since the representation was made and it does not measure the loss caused by the misrepresentation either when the representation was acted upon, or when the court decides whether to order rescission or not. The “loss caused by it”, in my judgment, can be measured by the cost of remedying the defect, or alternatively by the reduced market value attributable to the defect, together with additional compensation, if appropriate, of the kind described in Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297.
When the court is required to form its own view of what is equitable between the parties at the date of the hearing, it is dangerous to lay down any hard and fast rule to the effect that no account can be taken of changed market values. Apart from the capital value of the subject matter of the contract, as here, which might rise or fall due in the intervening period, there might be relevant market trading conditions which the court could properly take into account: cf. The Lucy [1983] 1 Lloyd’s LR 188, 202. Moreover, if it is right to take account of the current market value in assessing the loss which would be sustained by the Council, if rescission was ordered, then it would be “inequitable” not to have regard to this factor in the case of the builders also. But the effect of doing so is merely to re state the issue which the court has to decide: in the circumstances of the case, should the loss of market remain where it presently lies?
Viewed this way, it would be substantially unjust, in my judgment, to deprive the County Council of the bargain which it made in 1988, albeit that the bargain was induced by a misrepresentation innocently made, but which was of little importance in relation to the contract as a whole. That misrepresentation apart, the builders made what has proved to be so so far an unfortunate bargain for them (although they remain owners of an important potential development site in what is a notoriously cyclical market). To permit them to transfer the financial consequences to the Council, in the circumstances of this case, could properly be described as a windfall for them.
For the above reasons, and taking into account the nature of the alleged representation and the history of the matter generally, including the builders’ deliberate failure to make any serious attempt to find a solution to the difficulty which arose when the sewer was discovered, the equitable balance, in my judgment, lies in favour of upholding the contract and awarding damages in lieu of rescission in this case. If there was a live issue under section 2(2) I would award damages in lieu of rescission and order the amount of such damages to be assessed.
Clef Acquitaine Sarl & Anor v Laporte Materials (Barrow) Ltd
[2000] EWCA Civ 161 [2001] QB 488, [2000] 3 WLR 1760, [2000] 3 All ER 493
Brown LJ
In short, the judge concluded on the balance of probabilities that, but for Mr Dent’s deceit, the claimants could and would have entered into the same distribution agreements but on more favourable terms as to price, and that their loss was therefore the difference between the lower prices which in those circumstances they would have paid and the prices actually paid.
Although Mr Bannister disputes the sufficiency both of the claimants’ pleadings and of the evidence as a whole to support such a conclusion, in my judgment there is nothing in these points and I content myself with saying so. I therefore turn directly to examine the judge’s conclusions upon the legal argument arising, the recoverability of damages on this basis for the tort of deceit. Having been referred to a number of authorities, most notably Smith New Court Securities Ltd v Citibank NA [1997] AC 254, East v Maurer [1991] 1 WLR 461 and Downs v Chappell [1997] 1 WLR 426, the judge said this:
“Having considered those authorities, I cannot accept Mr Bannister’s argument that it is not legitimate to reconstruct the deal which Mr Gwyer and his companies would have made with [Sovereign] if the fraudulent misrepresentations had not been made in order to compare it with the deal they in fact made and thereby to calculate the plaintiffs’ recoverable loss in this case. It seems to me that that is the exercise which the Court of Appeal approved in East v Maurer and which Lord Steyn approved in Smith New Court. …. The result may be the same as a loss of bargain claim, but, as Mr Crane argued, that does not mean that it is a loss of bargain claim. It is the best way of judging the loss, if any, which was caused directly to the plaintiffs by being induced by the deceit to enter the agreements which they did … It establishes the loss, if any, which the plaintiffs have suffered with a view to putting them in the position they would have been in if no representations had been made.
In my judgment this leads to the conclusion that the plaintiffs have established a direct loss, recoverable as damages, in the sum of the difference between (a) what they would have paid had the price of [Sovereign’s] product purchased by them between 1979 and 1996 been the lowest bulk price list price, subject to increases but not decreases appearing in those lists and charged to UK customers, less a discount of 17.5%, and (b) what they actually paid in accordance with the agreements.
I do not accept Mr Bannister’s argument that the product bought had no value save what the plaintiffs paid for it. In my view its actual value to the plaintiff was what they would have paid for it, bulk list price less 17.5%, had they not been induced to pay more by the misrepresentations. Mr Dent said that customers who were aware of the market pressures paid below bulk list prices, which was tantamount to saying that the prices which they paid, below bulk list, were the market value to large customers like [the claimants].
The plaintiffs are entitled to recover by way of damages the full price paid by them (or rather, since the claim for over-charging has been formulated as a separate claim for breach of contract, the full price as fixed by the agreements), but they must give credit for the benefit they have received as a result of the transaction, and in my judgment that benefit is the real value to them of [Sovereign’s] product which they bought, namely bulk list price less 17.5%.”
Mr Bannister criticises the judge’s reasoning throughout that section of the judgment. It is, he submits, contrary to principle to seek to reconstruct the deal which would have been reached but for the deceit. In reality the claimants suffered no loss as a result of this transaction. The judge found no over-value of the products in any ordinary sense. The court should not, he submits, however gross the fraud, try to secure for the claimants some uncovenanted benefit. In contract the party making the representation is bound by it: he is selling his promise and it is enforceable against him. In tort, however, whether the claim be for negligent misrepresentation or for deceit, no claim arises unless actual loss results. Here none did. The judge expressly found that the level of prices charged caused them no loss of profits in their business in France. This whole case, the appellants argue, is an attempt to create for the claimants a contractual claim to which they were never entitled.
These to my mind are powerful arguments and I do not pretend to have found the point an easy one.
In Smith New Court Lord Browne-Wilkinson, summarising the principles applicable in assessing damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property, stated the first three as follows:
“(1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction … “
Lord Steyn said that the decision of the Court of Appeal in Doyle v Olby (Ironmongers) Limited [1969] 2 QB 158 justified the following propositions:
“(1) The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, i.e. the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain. (2) The plaintiff in an action for deceit is, however, entitled to be compensated in respect of his negative interest. The aim is to put the plaintiff into the position he would have been in if no false representation had been made. (3) The practical difference between the two measures was lucidly explained in a contempory case note on Doyle v Olby (Ironmongers) Ltd: G.H. Treitel, Damages for Deceit (1969) 32 M.L.R. 556, 558-559. The author said:
`If the plaintiff’s bargain would have been a bad one, even on the assumption that the representation was true, he will do best under the tortious measure. If, on the assumption that the representation was true, his bargain would have been a good one, he will do best under the first contractural measure (under which he may recover something even if the actual value of what he has recovered is greater than the price).’
(5) … the victim of the fraud is entitled to compensation for all the actual loss directly flowing from the transaction induced by the wrongdoer. That includes heads of consequential loss. (6) Significantly in the present context the rule in the previous paragraph is not tied to any process of valuation at the date of the transaction. It is squarely based on the overriding compensatory principle, widened in view of the fraud to cover all direct consequences. The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement.”
A little later in his speech, Lord Steyn considered Hobhouse LJ’s judgment in Downs v Chappell and observed:
“… it is not necessary in an action for deceit for the judge, after he has ascertained the loss directly flowing from the victim having entered into the transaction, to embark on a hypothetical reconstruction of what the parties would have agreed had the deceit not occurred.”
Finally, Lord Steyn said this:
“… the date of transaction rule is simply a second order rule applicable only where the valuation method is employed. If that method is inapposite, the court is entitled simply to assess the loss directly flowing from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it. …. There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendant.”
The difficulty in the present case, as it seems to me, is in deciding whether “all the damage (actual loss) directly flowing from the transaction” (Lord Browne-Wilkinson’s first principle and Lord Steyn’s fifth proposition can encompass, in a case like the present where the actual transaction entered into has been profitable rather than loss-making, the loss occasioned through the party deceived having entered into that particular transaction rather than a different transaction which would have been yet more profitable. In submitting that it cannot, Mr Bannister not surprisingly places considerable reliance on Lord Steyn’s statement that “it is not necessary …, after … ascertain[ing] the loss directly flowing from the victim having entered into the transaction, to embark on a hypothetical reconstruction of what the parties would have agreed had the deceit not occurred.” Indeed this very statement, he submits, usefully contrasts “the loss directly flowing from … the transaction” with any idea of comparing one profitable transaction with another in order to find a “loss” in this way. To do that, he submits, is also to offend against Lord Steyn’s first three propositions: it is to protect the claimants in respect of their positive interest rather than compensate them in respect of their negative interest, in this bargain; to create for them a contractual measure of damages. It comes to this: unless and until the claimants can show (which they cannot) that these distributorship agreements caused them loss, they have no claim in tort. It is not sufficient for their purpose to show only that other distributorship agreements would have given them greater profit.
It is helpful at this point to consider East v Maurer, the authority principally relied upon by the judge below in carrying out the exercise he did. In East v Maurer the plaintiffs bought a hairdressing salon from the defendant who falsely represented that he would not be working at another of his salons in the area. His fraud was discovered when the plaintiffs were unable to make their salon profitable and found business falling away. They were unable to sell the salon for three years. They were held entitled to recover damages consisting of the difference between its purchase and sale price, the expenses of buying and selling it, the cost of improvements to try to make it profitable, trading losses during the three year period, general damages for disappointment and inconvenience, and, most importantly for present purposes, damages representing the loss of profit the plaintiffs could reasonably have anticipated had they bought not the salon they were induced to buy by the defendant’s deceit but rather a different hairdressing business bought for a similar sum.
Beldam LJ at page 467 said this:
“… I consider that on the facts found by the judge in the present case, the plaintiffs did establish that they had suffered a loss due to the defendant’s misrepresentation which arose from their inability to earn the profits in the business which they hoped to buy in the Bournemouth area. I would therefore reject the submission of [counsel for the defendant] that loss of profits is not a recoverable head of damage in cases of this kind.”
Having then criticised the trial judge for “bas[ing] his award on an assessment of the profits which the business actually bought by the plaintiffs might have made if the statements made by the first defendant had amounted to a warranty that customers would continue to patronise the salon in Exeter Road”, Beldam LJ continued:
“It seems to me that he should have begun by considering the kind of profit which the second plaintiff might have made if the representation which induced her to buy the business … had not been made, and that involved considering the kind of profits which she might have expected to make in another hairdressing business bought for a similar sum.”
Mustill LJ at page 468 agreed and added:
“… the best course in a case of this kind is to begin by comparing the position of the plaintiff as it would have been if the act complained of had not taken place with the position of the plaintiff as it actually became. This establishes the actual loss which the plaintiff has suffered and often helps to avoid the pitfalls of double counting, omissions and impermissible awards of both a capital and an income element in respect of the same loss …
In the present case the act complained of is the making of the fraudulent representation, coupled with the reliance placed upon it by the plaintiffs in concluding the bargain. If this had not happened the plaintiffs would, on the judge’s findings, have … bought a new business in Bournemouth albeit not the one in Exeter Road. …
It is objected that the loss of profits is not properly recoverable because it is appropriate not to a claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits does not stem from the making of the contract but from the fact that the profit made was not what was anticipated. I should have thought this argument sound if the judge had included an item for loss of the Exeter Road profits; but he has not done so. The loss of profits award relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the Exeter Road business, and the profits of the latter are treated by the judge solely as some evidence of what the profits of the other business might have been.”
As the judge below observed, East v Maurer was approved by Lord Steyn in Smith New Court at page 282:
“East v Maurer if of some significance since it throws light on a point which arose in argument. Counsel for Citibank argued that in the case of a fraudulently induced sale of a business, loss of profits is only recoverable on the basis of the contractual measure and never on the basis of the tort measure applicable to fraud. This is an over-simplification. The plaintiff is not entitled to demand that the defendant must pay to him the profits of the business as represented. On the other hand, East v Maurer shows that an award based on the hypothetical profitable business in which the plaintiff would have engaged but for deceit is permissible: it is classic consequential loss.”
Mr Bannister submits that East v Maurer was a very different case from the present and that the point established there and approved in Smith New Court cannot avail the claimants here. It is one thing to say that, in quantifying the undoubted losses resulting from the plaintiffs’ tortiously induced purchase of the salon in Exeter Road, they could properly include as consequential loss the profits they might reasonably have expected to make in another business which they would, but for the defendant’s fraud, have purchased; quite another to say that, even had Exeter Road proved profitable, they could have claimed in tort on the basis that, but for the fraud, it would have been more profitable still.
The novelty of the present case lies in the claimants having suffered no loss from the transaction save only from having entered into that transaction rather than a still more profitable one. That distinguishes this case from all the others we were shown. Is it, however, a distinction fatal to the claimants’ success?
Mr Crane QC submits not. His starting point is Lord Steyn’s sixth proposition in Smith New Court with regard to “the overriding compensatory principle”:
“The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement.”
The claimants’ argument is quite straightforward. Before Mr Dent’s fraudulent statement, the claimants were anxious to become Sovereign’s exclusive distributors in France and were negotiating agreements, and in particular prices and a price increase formula, to that end. In reliance on the fraudulent statement they became locked into these long term agreements and a commitment to pay prices and price increases larger than would otherwise have been the case. The judge below did no more and no less than compensate them for having thereby worsened their position. This accorded with the overriding principle.
In my judgment this argument is correct. The judge did not, be it noted, make the mistake of awarding damages by reference to the contractual measure. Indeed it is not altogether clear what that measure would have been. It would have depended on whether the warranty was that Sovereign’s UK customers paid what Mr Dent said they paid, or that the claimants would always be charged 25% less than UK customers paid. If it had been the former, there was no evidence to suggest that the claimants suffered loss by its breach, in particular no evidence that Sovereign’s UK customers were able (as Mr Gwyer had feared) to undersell the claimants in France. Had it been the latter, however, then instead of taking 17½% off bulk price list prices, the judge would have had to take 25% off (the sometimes heavily discounted) bulk price list prices. As it was, of course, the judge concluded that, had Mr Dent, in response to Mr Gwyer’s questioning, told the truth (or at least not lied) about what his UK customers were paying, the claimants would have got a substantially better deal than they did, but not as good a deal as the defendants dishonestly pretended they were getting.
As for Lord Steyn’s statement that it is unnecessary “to embark on a hypothetical reconstruction of what the parties would have agreed had the deceit not occurred”, this has to be understood in the context of Hobhouse LJ’s “qualification” in Downs v Chappell which Lord Steyn was criticising. What Hobhouse LJ had done, by way of a “check” on the conventional measure, was “to compare the loss consequent upon entering the transaction with what would have been the position had the represented or supposed state of affairs actually existed.” To reject that exercise (a different exercise, be it noted, from that undertaken by the judge in the present case) was not to reject the possibility that the ascertainment of loss in the first place might itself require a “hypothetical reconstruction of what the parties would have agreed had the deceit not occurred.” If, as was held in East v Maurer (a holding expressly approved by Lord Steyn), consequential loss can be established and awarded by reference to “the hypothetical profitable business in which the plaintiff would have engaged but for [the] deceit”, why should that loss, to be recoverable, have to be parasitic on some other, more direct, loss, and why should the alternative “hypothetical profitable business” have to be a business (or, as here, contract) notionally acquired from some third party?
True it is that in Downs v Chappell Hobhouse LJ, in a part of the judgment not criticised in Smith New Court, said at page 433:
“It was wrong both factually and legally for the judge to create the hypothesis that the second defendants could and would have given the plaintiffs accurate figures so as to give them an accurate basis upon which to decide whether to make a contract with Mr Chappell.”
But that was in the context of establishing liability, not quantifying damage. True it is too that later in his judgment at page 441, having referred to East v Maurer, Hobhouse LJ said this:
“In general, it is irrelevant to enquire what the representee would have done if some different representation had been made to him or what other transactions he might have entered into if he had not entered onto the transaction in question. Such matters are irrelevant speculations …”
That, however, was expressed to be “in general” and, as I conclude, there will be particular cases, of which this is one, where to give effect to the overriding compensatory rule it will be both possible on the facts, and appropriate in law, to hypothesise. Not every hypothesis involves irrelevant speculation.
I have, in short, reached the conclusion that there is no absolute rule requiring the person deceived to prove that the actual transaction into which he was induced to enter was itself loss-making. (Indeed that concept itself is an uncertain one: is a business which survives only by dint of the proprietor limiting himself to subsistence wages loss-making or profitable?) It will sometimes be possible, as it was here, to prove instead that a different and more favourable transaction (either with the defendant or with some third party) would have been entered into but for the fraud, and to measure and recover the claimants’ loss on that basis.
It is, I should just add, on that basis rather than on the basis that the claimants are entitled to be compensated as if they had been induced to make each and every purchase above “market value”, that I would uphold this award. It is, of course, true that the normal measure of damages for a fraudulently induced purchase of shares or other property or services is the price paid less their actual value. I have, however, some difficulty in ascribing to these products any particular value such as would enable this claim to be disposed of according to so enticingly conventional an approach. After all, as already stated, these products were retailed in France at a 300-400% mark-up (although mark-up, of course, is very different from profit); why then should actual value be equated with the prices the claimants could reasonably have hoped to negotiate under their unique distributorship agreements?
That, however, matters not. Once it is recognised that the claimants need not prove each purchase, any more than the agreements as a whole, to be loss-making, it becomes unnecessary to force the case into the straightjacket of value/price comparison. Lord Browne-Wilkinson’s third principle in terms relates to the purchase of property, not to long-term agreements like these.
Standard Chartered Bank v Pakistan National Shipping Corp
[2002] UKHL 43 [2002] 2 All ER (Comm) 931, [2003] AC 959, [2003] 1 All ER 173, [2002] BCC 846, [2003] 1 BCLC 244, [2002] UKHL 43, [2003] 1 Lloyd’s Rep 227, [2003] 1 LLR 227, [2003] 1 AC 959, [2002] CLC 1330, [2002] 3 WLR 15470.
Lord Hoffmann
“1(1)Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage … “
4. …’fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to a defence of contributory negligence.”
11. In my opinion, the definition of “fault” is divided into two limbs, one of which is applicable to defendants and the other to plaintiffs. In the case of a defendant, fault means “negligence, breach of statutory duty or other act or omission” which gives rise to a liability in tort. In the case of a plaintiff, it means “negligence, breach of statutory duty or other act or omission” which gives rise (at common law) to a defence of contributory negligence. The authorities in support of this construction are discussed by Lord Hope of Craighead in Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360, 382. It was also the view of Professor Glanville Williams in Joint Torts and Contributory Negligence (1951) at p 318.
12. It follows that conduct by a plaintiff cannot be “fault” within the meaning of the Act unless it gives rise to a defence of contributory negligence at common law. This appears to me in accordance with the purpose of the Act, which was to relieve plaintiffs whose actions would previously have failed and not to reduce the damages which previously would have been awarded against defendants. Section 1(1) makes this clear when it says that “a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but [instead] the damages recoverable in respect thereof shall be reduced…”
13. The question is therefore whether at common law SCB’s conduct would be a defence to its claim for deceit. Sir Anthony Evans thought that it would. He said that although the conduct of SCB in making a false statement about when the documents had been presented was intentional or reckless, the House of Lords had decided in Reeves’s case [2000] 1 AC 360 that an intentional act could give rise to a defence of “contributory negligence” at common law and therefore count as “fault” for the purpose of the Act. I am not sure that it was necessary to rely upon Reeves for this purpose, because the Act requires fault in relation to the damage which has been suffered. That damage was SCB’s loss of the money it paid Oakprime. In Reeves, the plaintiff’s husband had intended to cause the damage he suffered. He intended to kill himself. But SCB did not intend to lose its money. It would be more accurate to say that it was careless in making payment against documents which, as it knew or ought to have known, did not comply with the terms of the credit, on the assumption that it could successfully conceal these matters from Incombank. In respect of the loss suffered, SCB was in my opinion negligent.
14. Be that as it may, the real question is whether the conduct of SCB would at common law be a defence to a claim in deceit. Sir Anthony Evans said that the only rule supported by the authorities was that if someone makes a false representation which was intended to be relied upon and the other party relies upon it, it is no answer to a claim for rescission or damages that the claimant could with reasonable diligence have discovered that the representation was untrue. Redgrave v Hurd (1881) 20 Ch D 1 is a well known illustration. That was not the case here. SCB should not have paid even if they could not have discovered that the representation about the bill of lading was untrue. But in my opinion there are other cases which can be explained only on the basis of a wider rule. In Edgington v Fitzmaurice (1885) 29 Ch D 459 the plaintiff invested £1,500 in debentures issued by a company formed to run a provision market in Regent Street. Five months later the company was wound up and he lost nearly all his money. He sued the directors who had issued the prospectus, alleging that they had fraudulently or recklessly represented that the debenture issue was to raise money for the expansion of the company’s business (“develop the arrangements…for the direct supply of cheap fish from the coast”) when in fact it was to pay off pressing liabilities. The judge found the allegation proved and that the representation played a part in inducing the plaintiff to take the debentures. But another reason for his taking the debentures was that he thought, without any reasonable grounds, that the debentures were secured upon the company’s land. Cotton LJ said, at p 481, that this did not matter:
“It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss nonetheless resulted from that misstatement. It is not necessary to shew that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable.”
Bowen and Fry LJJ gave judgments to the same effect.
15. This case seems to me to show that if a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known it was false, it does not matter that he also held some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either. The law simply ignores the other reasons why he paid. As Lord Cross of Chelsea said in Barton v Armstrong [1976] AC 104, 118:
“If…Barton relied on the [fraudulent] misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision to execute the deed, for in this field the court does not allow an examination into the relative importance of contributory causes. ‘Once make out that there has been anything like deception and no contract resting in any degree on that foundation can stand’: per Lord Cranworth LJ in Reynell v Sprye (1852) 1 De G M & G 660, 708.”
16. In Edgington v Fitzmaurice 29 Ch D 459 the defence was not that the plaintiff could have discovered that the representation was false. It was that he was also induced by mistaken beliefs of his own, but for which he would not have subscribed for the debentures. That is very like the present case. It is said here that although SCB would not have paid if they had known the bill of lading to be falsely dated, they would also not have paid if they had not mistakenly and negligently thought that they could obtain reimbursement. In my opinion, the law takes no account of these other reasons for payment. This rule seems to me based upon sound policy. It would not seem just that a fraudulent defendant’s liability should be reduced on the grounds that, for whatever reason, the victim should not have made the payment which the defendant successfully induced him to make.
17. As Sir Anthony Evans correctly pointed out, the rule in Redgrave v Hurd 20 Ch D 1 applies to both innocent and fraudulent misrepresentations. The wider rule in Edgington v Fitzmaurice probably applies only to fraudulent misrepresentations. In Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 Sir Donald Nicholls V-C said that, in principle, a defence of contributory negligence should be available in a claim for damages under section 2(1) of the Misrepresentation Act 1967. But since the alleged contributory negligence was that the plaintiff could with reasonable care have discovered that the representation was untrue, the rule in Redgrave v Hurd prevented the conduct of the plaintiff from being treated as partly responsible for the loss. This left open the possibility that, in a case of innocent representation, some other kind of negligent causative conduct might be taken into account.
18. In the case of fraudulent misrepresentation, however, I agree with Mummery J in Alliance & Leicester Building Society v Edgestop Ltd [1993] 1 WLR 1462 that there is no common law defence of contributory negligence. (See also Carnwath J in Corporacion Nacional del Cobre de Chile v Sogemin Metals Ltd [1997] 1 WLR 1396 and Blackburn J in Nationwide Building Society v Thimbleby & Co [1999] Lloyd’s Rep PN 359). It follows that, in agreement with the majority in the Court of Appeal, I think that no apportionment under the 1945 Act is possible.
Howard Marine and Dredging Co. Ltd v A. Ogden & Sons (Excavations) Ltd.
[1977] EWCA Civ 3 [1978] QB 574,
Bridge LJ
The first question then is whether the respondents would be liable in damages in respect of Mr. O’Loughlin’s misrepresentation if it had been made fraudulently, that it to say, if he had known that it was untrue. An affirmative answer to that question is inescapable. The judge found in terms that what Mr. O’Loughlin said about the capacity of the barges was said with the object of getting the hire contract for the respondents, in other words with the intention that it should be acted on (judgment 29 C and 3D G). This was clearly right. Equally clearly the misrepresentation was in fact acted on by the appellants. It follows, therefore, on the plain language of the statute that, although there was no allegation of fraud, the respondents must be liable unless they proved that Mr. O’Loughlin had reasonable ground to believe what he said about the barges’ capacity.
It is unfortunate that the learned judge never directed his mind to the question whether Mr. O’Loughlin had any reasonable ground for his belief. The question he asked himself, in considering liability under the Misrepresentation Act, 1967, was whether the innocent misrepresentation was negligent. He concluded hat if Mr. O’Loughlin had given the inaccurate information in the course of the April telephone conversations he would have been negligent to do so but that in the circumstances obtaining at the Otley interview in July there was no negligence. I take it that he meant by this that on the earlier occasions the circumstances were such that he would have been under a duty to check the accuracy of his information, but on the later occasions he was exempt from any such duty. I appreciate the basis of this distinction, but it seems to me, with respect, quite irrelevant to any question of liability under the statute. If the representee proves a misrepresentation which, if fraudulent, would have sounded in damages, the onus passes immediately to the representor to prove that he had reasonable ground to believe the facts represented. In other words the liability of the representor does not depend upon his being under a duty of care the extent of which may vary according to the circumstances in which the representation is made. In the course of negotiations leading to a contract the statute imposes an absolute obligation not to state facts which the representor cannot prove he had reasonable ground to believe.
Although not specifically posing the question of whether he had reasonable ground for his belief, the judge made certain findings about Mr. O’Loughlin’s state of mind. He said (judgment page 5 D-3): “Mr. O’Loughlin looked at the documents on the ships he was in charge of including HB2 and HB3’s German documents. He is not a master of maritime German. He saw, but did not register, the deadweight figure of 1055.135 tonnes. Being in the London Office he went to the City and looked up Lloyds Register. There he noted that the summer loading deadweight figure for B41 and B45, described as TM sand carriers, was 1800 tonnes. This figure stayed in his mind. But it was one of Lloyds Register’s rare mistakes”. Later the judge said a propos of Mr. O’Loughlin’s state of mind at the Otlay interview: “He had in his mind the 1800 tonnes figure from the Bible”, – meaning Lloyds Register –
“obviously an approximation and certainly subject to the Bible’s caveat”.
It is tempting to adopt these findings simpliciter and to conclude that the figure Mr. O’Loughlin had seen in Lloyds Register afforded reasonable ground for his belief. But the learned judge’s summary in the passages I have cited from the -judgment not only over-simplifies the effect of Mr. O’Loughlin’s evidence on this matter, it also embodies at one point a positive misapprehension of what Mr. O’Loughlin said. At Volume 1 page 8 D of the transcript the following evidence is given:
“(Q) (by Mr. Evans) Had you seen that document among the company’s files prior to April 1974?
(A) I would have said that I would have sighted it.
(MR JUSTICE BRISTOW) If you did see it, did it register?
(A) Not really, my Lord.”
The document, however, to which this evidence related was not the document containing the vital figure of the barges’ deadweight capacity, but another German ship’s document of earlier date. Mr. O’Loughlin never said that the deadweight figure “did not register” with him. He acknowledged that he had seen it and understood it. It is true he said that he had not noticed the discrepancy between the deadweight figure in the German ship’s document and that in Lloyds Register, though he had noticed a discrepancy in the figures for the gross and registered tonnage and he had quite correctly taken these latter figures from the German ship’s documents.
He was pressed to explain how it came about that, having seen both the inaccurate figure in Lloyds Register and the accurate figure in the German ship’s documents for deadweight capacity he came to rely on the former and to disregard the latter. This certainly called for explanation since both according to the expert evidence and as a matter of common sense it would normally be expected that the original figures in the ship’s documents were more reliable than the derivative figures in Lloyds Register. This part of Mr. O’Loughlin’s evidence is of such importance that I will set out the crucial passages in full.
He is asked about the vital document in chief at Volume 1 page 9 C – D:
“(Q) Was this document in your possession?
(A) It was-, yes.
(Q) Had you looked at this document at all?
(A) I had, yes. Basically as soon as I started to go through it or look through it, I saw that all the measurements – all they were talking about was for work in freshwater or sweet water, they call it.
(Q) I think if you looked at page 50, you would find the entry is ‘Ladefahigkeit in Susswasser’ – a figure of 1000.135 with no further measurement. Then if you turn to page 44, there is a figure for ‘Tragfahigkeit’ of 1055.135 tonnes. Had you those entries in mind when you consulted Lloyds Register?
(A) Not really because, as I say, they are basically talking about deadweight in freshwater and the other thing is that all the time when we are talking about barges of this nature, one doesn’t talk about deadweight, one talks about their cubic capacity”.
Then, in cross examination at page 63 G – 64 A: “
(MR. LlOYD) When you were giving your evidence yesterday, you said that you did not pay much attention to the document at 1/32 and 1/42 because the deadweight relates to freshwater?
(A) That is correct.
(Q) But I think you also accepted this morning that that would only make a difference of about 25/30 tonnes at the most to the deadweight cargo carrying capacity?
(A) Something of that order.
(Q) So that would still give you a much more accurate view of the deadweight in saltwater than anything else that was available to you?
(MR. JUSTICE BRISTOW) Mr. Lloyd, the point is made. It is there or better or for worse. It is a beautiful one, but it is made!
(MR. LlOYD) Now, you based yourself you said instead- You rejected this figure because it was freshwater and you based yourself instead on the Lloyds Register figure of 1800 tonnes?
(A) Precisely”.
Finally, in cross examination at page 67 F – G:
(Q) You knew that the figure in the German document, the deadweight was 1050 tonnes in freshwater.
(MR. JUSTICE BRISTOW) He says he has seen it, but it had not registered.
(MR. L10YD) You had seen that figure?
(A) I had looked at that
(Q) You had seen that figure, had you not?
(A) I had seen that figure among many others in German.
(Q) And you rejected it, as you told my Lord yesterday, for two reasons; because it was freshwater and because you were only concerned with cubic capacity, (A) That is precisely so.”
It should be pointed out that the learned judge’s- intervention in the last passage quoted reflects the same misapprehension as the passage cited from his judgment.
I am fully alive to the dangers of trial by transcript and it is to be assumed that Mr. O’Loughlin was perfectly honest throughout. But the question remains whether his evidence, however benevolently viewed, is sufficient to show that he had an objectively reasonable ground to disregard the figure in the ship’s documents and to prefer the Lloyds Register figure. I think it is not. The fact that he was more interested in cubic capacity could not justify reliance on one figure of deadweight capacity in preference to another. The fact that the deadweight figure in the skip’s documents was a freshwater figure was of no significance since, as he knew, the difference between freshwater and sea water deadweight capacity was minimal. Accordingly I conclude that the respondents failed to prove that Mr. O’Loughlin had reasonable ground to believe the truth of his misrepresentation to Mr. Redpath.
Having reached a conclusion favourable to the appellants on the issue of liability under the Misrepresentation Act, 1967, I do not find it necessary to express a concluded view on the issue of negligence at common law. As at present advised I doubt if the circumstances surrounding the misrepresentation at the Otley interview were such as to impose on the respondents a common law duty of care for the accuracy of the statement. If there was such a duty, I doubt if the evidence established a breach of it.
There remains the question whether the respondents can escape from their liability under the statute in reliance on Clause 1 of the charterparty which provides:
“On handing over by the owners, the vessel shall be tight, staunch and strong, but charterers’ acceptance of handing over the vessel shall be conclusive evidence that they have examined the vessel and found her to be in all respects seaworthy, in good order and condition and in all respects fit for the intended and contemplated use by the charterers and in every other way satisfactory to them”.
A clause of this kind is to be narrowly construed. It can only be relied on as conclusive evidence of the charterers’ satisfaction in relation to such attributes of the vessel as would be apparent on an ordinary examination of the vessel. I do not think deadweight capacity is such an attribute. It can only be ascertained by an elaborate calculation or by an inspection of the ship’s documents. But even if, contrary to this view, the clauses can be read as apt to exclude liability for the earlier misrepresentation, The respondents still have to surmount the restrictions imposed by section 3 of the Misrepresentation Act, 1967, which provides:
“If any agreement (whether made before or after the commencement of this Act) contains a provision which would exclude or restrict –
(a) any liability to which a party to a contract may be subject by of any misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the tract by reason of such a misrepresentation; that provision shall be of no effect except to the extent (if any) that, in any proceedings arising out of the contract, the court or arbitrator may allow reliance on it as being fair and reasonable in the circumstances of the case”.
What the learned judge said in this matter was (Transcript 26A):
“If the wording of the clause is apt to exempt from responsibility for negligent misrepresentation as to carrying capacity, I hold that such exemption is not fair and reasonable”.
The judge having asked himself the right question and answered it as he did in the exercise of the discretion vested in him by the Act, I can see no ground on which we could say that he was wrong.
I would accordingly allow the appeal to the extent of holding that the appellants establish liability against the respondents under Section 2(1) of the Misrepresentation Act, 1967 for any damages they suffered as a result of Mr. O’Loughlin’s misrepresentation at the Otley interview in the terms as found by the learned judge.
Royscot Trust Ltd v Rogerson & Anor
[1991] EWCA Civ 12 [1991] 3 All ER 294, [1991] 2 QB 297
Balcombe LJ
As a result of some dicta by Lord Denning M.R. in two cases in the Court of Appeal – Gosling v. Anderson [1972] E.G.D. 709 and Jarvis v. Swans Tours [1973] QB 233, 237 – and the decision at first instance in Watts v. Spence [1976] Ch. 165, there was some doubt whether the measure of damages for an innocent misrepresentation giving rise to a cause of action under the 1967 Act was the tortious measure, so as to put the representee in the position in which he would have been if he had never entered into the contract, or the contractual measure, so as to put the representee in the position in which he would have been if the misrepresentation had been true, and thus in some cases give rise to a claim for damages for loss of bargain. Lord Denning’s remarks in Gosling v. Anderson were concerned with an amendment to a pleading, while his remarks in Jarvis v. Swans Tours were clearly obiter. Watts v. Spence was disapproved by this court in Sharneyford Supplies Ltd v. Edge [1987] Ch. 305, 323. However, there is now a number of decisions which make it clear that the tortious measure of damages is the true one. Most of these decisions are at first instance and will be found in Chitty on Contract (26th ed.) para. 439, note 63 and in McGregor on Damages (15th ed.) para. 1745. One at least, Chesneau v. Interhome Ltd (1983) 134 N.L.J. 341 is a decision of this court. The claim was one under section 2(1) of the 1967 Act and the appeal concerned the assessment of damages. In the course of his judgment Eveleigh L.J. said (C. A. Transcript 83, No. 238 p.5):
“[Damages] should be assessed in a case like the present one on the same principles as damages are assessed in tort. The sub-section itself says: ‘…if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable…’ By ‘so liable’ I take it to mean liable as he would be if the misrepresentation had been made fraudulently.”
In view of the wording of the subsection it is difficult to see how the measure of damages under it could be other than the tortious measure and, despite the initial aberrations referred to above, that is now generally accepted. Indeed counsel before us did not seek to argue the contrary.
The first main issue before us was: accepting that the tortious measure is the right measure, is it the measure where the tort is that of fraudulent misrepresentation, or is it the measure where the tort is negligence at common law? The difference is that in cases of fraud a plaintiff is entitled to any loss which flowed from the defendant’s fraud, even if the loss could not have been foreseen – see Doyle v. Olby (Ironmongers) Ltd [1969] 2 QB 158. In my judgment the wording of the subsection is clear: the person making the innocent misrepresentation shall be “so liable”, i.e. liable to damages as if the representation had been made fraudulently. This was the conclusion to which Walton J. came in F & B Entertainments Ltd v. Leisure Enterprises Ltd (1976) 240 E.G. 455, 461. See also the decision of Sir Douglas Franks Q.C. sitting as a Deputy High Court Judge in McNally v. Welltrade International Ltd [1978] I.R.L.R. 497. In each of these cases the judge held that the basis for the assessment of damages under section 2(1) of the 1967 Act is that established in Doyle v. Olby. This is also the effect of the judgment of Eveleigh L.J. in Chesneau v.Interhome Ltd already cited: “By ‘so liable’ I take it to mean liable as he would be if the misrepresentation had been made fraudulently.”
This was also the original view of the academic writers.
In an article on the 1967 Act in 30 M.L.R. by Atiyah and Treitel,
the authors say (at p.373):
“The measure of damages in the statutory action will apparently be that in an action of deceit… But more probably the damages recoverable in the new action are the same as those recoverable in an action of deceit.”
Professor Treitel has since changed his view. In his book on the Law of Contract (7th ed.) at p.278 he says:
“Where the action is brought under section 2(1) of the Misrepresentation Act, one possible view is that the deceit rule will be applied by virtue of the fiction of fraud. But the preferable view is that the severity of the deceit rule can only be justified in cases of actual fraud and that remoteness under section 2(1) should depend, as in actions based on negligence, on the test of foreseeability.”
The only authority cited in support of the “preferable” view is Shepheard v. Broome [1904] A.C. 342, a case under section 38 of the Companies Act 1867, which provided that in certain circumstances a company director, although not in fact fraudulent, should be “deemed fraudulent”. As Lord Lindley said at p.346: “To be compelled by Act of Parliament to treat an honest man as if he were fraudulent is at all times painful”, but he went on to say: “but the repugnance which is naturally felt against being compelled to do so will not justify your Lordships in refusing to hold the appellant responsible for acts for which an Act of Parliament clearly declares he is to be held liable”. The House of Lords so held.
It seems to me that that case, far from supporting Professor Treitel’s view, is authority for the proposition that we must follow the literal wording of section 2(1), even though that has the effect of treating, so far as the measure of damages is concerned, an innocent person as if he were fraudulent. Chitty on Contracts (26th ed.) para. 439 says:
“…it is doubtful whether the rule that the plaintiff may recover even unforeseeable losses suffered as the result of fraud would be applied; it is an exceptional rule which is probably justified only in cases of actual fraud.”
No authority is cited in support of that proposition save a reference to the passage in Professor Treitel’s book cited above. Professor Furmston in Cheshire Fifoot and Furntston’s Law of Contract (11th ed.) p.286 says:
“It has been suggested [and the reference is to the passage in Atiyah and Treitel’s article cited above] that damages under section 2(1) should be calculated on the same principles as govern the tort of deceit. This suggestion is based on a theory that section 2(1) is based on a ‘fiction of fraud’. We have already suggested that this theory is misconceived. On the other hand the action created by section 2(1) does look much more like an action in tort than one in contract and it is suggested that the rules for negligence are the natural ones to apply.”
The suggestion that the “fiction of fraud” theory is misconceived occurs at p.271, in a passage which includes the following:
“Though it would be quixotic to defend the drafting of the section, it is suggested that there is no such ‘fiction of fraud’ since the section does not say that a negligent misrepresentor shall be treated for all purposes as if he were fraudulent. No doubt the wording seeks to incorporate by reference some of the rules relating to fraud but, for instance, nothing in the wording of the subsection requires the measure of damages for deceit to be applied to the statutory action.”
With all respect to the various learned authors whose works I have cited above, it seems to me that to suggest that a different measure of damage applies to an action for innocent misrepresentation under the section than that which applies to an action for fraudulent misrepresentation (deceit) at common law is to ignore the plain words of the subsection and is inconsistent with the cases to which I have referred. In my judgment, therefore, the Finance Company is entitled to recover from the Dealer all the losses which it suffered as a result of its entering into the agreements with the Dealer and the Customer, even if those losses were unforeseeable, provided that they were not otherwise too remote.
If the question of foreseeability had been the only issue in this appeal, the judgment so far would have rendered it unnecessary to decide whether, in the circumstances of the present case, the wrongful sale of the car by the Customer was reasonably foreseeable by the Dealer. Since the judge did not expressly deal with this point in his judgment, it might have been preferable that we should not do so. Nevertheless there is a separate issue whether the wrongful sale of the car was novus actus interveniens and thus broke the chain of causation, and the reasonable foreseeability of the event in question is a factor to be taken into account on that issue. Accordingly it is necessary to deal with this matter. Mr Kennedy, for the Dealer, submitted that while a motor-car dealer might be expected to foresee that a customer who buys a car on hire-purchase may default in payment of his instalments, he cannot be expected to foresee that he will wrongfully dispose of the car. He went on to submit that, in the particular circumstances of this case, where the Customer was apparently reputable, being a young married man in employment, it was even less likely that the Dealer could have foreseen what might happen. There appears to have been no oral evidence directed to this particular point.
In my judgment this is to ignore both the reality of the transaction and general experience. While in legal theory the car remains the property of the finance company until the last hire-purchase instalment is paid, in practice the purchaser is placed in effective control of the car and treats it as his own. Further, there have been so many cases, both civil and criminal, where persons buying a car on hire-purchase have wrongfully disposed of the car, that we can take judicial notice that this is an all too frequent occurrence. Accordingly I am satisfied that, at the time when the Finance Company entered into the agreements with the Dealer and the Customer, it was reasonably foreseeable that the Customer might wrongfully sell the car.
Mr Kennedy’s next submission was that the Customer’s wrongful sale of the car was novus actus interveniens. This issue was considered by the judge, although the brief note of his judgment on this point is corrupt and is not agreed by counsel. It is implicit in his decision to award £1600 damages to the Finance Company that the sale was not novus actus interveniens: otherwise on the figures in this case he would have been bound to find that the Finance Company had suffered no loss. However, the judgment contains no indication of how he came to that conclusion.
In the present case the Customer was a free agent and his act in selling the car was unlawful. Nevertheless neither of these facts is conclusive in determining whether the sale of the car was a novus actus sufficient to break the chain of causation. See generally Clerk and Lindsell on Torts (16th ed.) paras. 1-117 to 1-121; McGregor on Damages (15th ed.) paras. 152-166. However, if the Dealer should reasonably have foreseen the possibility of the wrongful sale of the car, then that is a strong indication that the sale did not break the chain of causation. As Winn L.J. said in Iron and Steel Holding and Realisation Agency v. Compensation Appeal Tribunal [1966] 1 W.L.R. 480, 492:
“In my opinion, wherever any intervening factor was itself foreseen or reasonably foreseeable by the actor, the person responsible for the act which initiated the chain of causes leading to the final result, that intervening cause is not itself, in the legal sense, a novus actus interveniens breaking the chain of causation and isolating the initial act from the final result.”
I doubt whether further citation of authority will be helpful: in this field authority is almost too plentiful. For the reasons I have already given, in my judgment the Dealer should reasonably have foreseen the possibility that the Customer might wrongfully sell the car. In my judgment, therefore, the sale was not novus actus interveniens and did not break the chain of causation.
Mr Kennedy’s final submission was that the normal rule is that the plaintiff’s loss must be assessed as at the date of his reliance upon the misrepresentation: since the Finance Company paid £6,400 to the Dealer and in return acquired title to a car which was worth at least that sum, its loss assessed at that date was nil. This submission again falls into the error of treating the transaction according to its technicalities: that the Finance Company was interested in purchasing the car. That was not the reality: the Finance Company was interested in receiving the totality of the instalments from the Customer. Once the transaction is looked at in this way the authorities on which Mr Kennedy relied to support this submission, being all concerned with misrepresentations leading to the acquisition of chattels, can be seen to be of little assistance. But even in such a case the rule is not a hard and fast one – see the recent case of Naughton v. O’Callaqhan [1990] 3 All E.R. 191. So I reject this submission also.
Accordingly, I would dismiss the Dealer’s appeal. I would allow the Finance Company’s cross-appeal, set aside the judgment of 22nd February 1990 and direct that in its place judgment be entered for the Finance Company against the Dealer in the sum of £3,625.24 together with interest. The Finance Company accepts that it will have to give credit for any sums that it may receive from its judgment against the Customer.
William Sindall Plc v Cambridgeshire County Council
[1993] EWCA Civ 14 [1994] WLR 1016, [1994] 3 All ER 932, [1994] 1 WLR 1016,
Hoffman LJ
5. Discretion.
My conclusion that there are no grounds for rescission, either for misrepresentation or mistake, means that it is unnecessary to consider whether the judge correctly exercised his discretion under Section 2(2) of the Misrepresentation Act 1967 not to award damages in lieu of rescission. But in case this case goes further, I should say that in my judgment the judge approached this question on a false basis, arising from his mistake about the seriousness of the defect. This vitiated the exercise of the discretion and would have made it necessary, if we thought that Sindall would otherwise have been entitled to rescind for misrepresentation, to exercise our own discretion under Section 2(2).
The section reads as follows:
“Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be, or has been, rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.”
This provision was adopted as a result of the Tenth Report of the Law Reform Committee, (1962) Cmnd. 1782, which also recommended abolishing the bar on rescission after completion. The relevant paragraphs of the Report were 11 and 12:
“11. A more fundamental objection which may be advanced against our recommendation [to abolish the bar on rescission after completion] concerns the drastic character of the remedy to which the plaintiff would be entitled. Unless the court’s power to grant rescission is made more elastic than it is at present, the court will not be able to take account of the relative importance or unimportance of the facts which have been misrepresented. A car might be returned to the vendor because of a misrepresentation about the mileage done since the engine was last overhauled, or a transfer of shares rescinded on account of an incorrect statement about the right to receive the current dividend. In some cases the result could be as harsh on the representor as the absence of a right to rescind under the current law can be on the representee. Moreover, the conflict between remedies for misrepresentation and those for breach of contract would be aggravated. There is already the anomaly that a statement embodied in the contract and constituting a minor term of it is treated as a warranty, the breach of which gives only a right to damages, whereas the same statement as a representation inducing the contract enables the latter to be rescinded. Before the contract is executed and at a time when the parties can be relatively easily restored to their original positions, this anomaly may not matter very much, but the position would be very different if the court had no option but to order rescission after the contract had been executed.
12. To meet these objections we recommend that wherever the court has power to order rescission it should, as an alternative, have a discretionary power to award damages if it is satisfied that these would afford adequate compensation to the plaintiff, having regard to the nature of the misrepresentation, and the fact that the injury suffered by the plaintiff is small compared with what rescission would involve. The courts were given power to award damages in addition to or in substitution for an injunction or a decree of specific performance by Section 2 of Lord Cairns’ Act (the Chancery Procedure Amendment Act 1858) and since the decision of the House of Lords in Leeds Industrial Co operative Society Limited v. Slack [1924] AC 851, the power has been exercised on principles similar to those we have just mentioned.”
The discretion conferred by Section 2(2) is a broad one, to do what is equitable. But there are three matters to which the court must in particular have regard.
The first is the nature of the misrepresentation. It is clear from the Law Reform Committee’s Report that the court was meant to consider the importance of the representation in relation to the subject matter of the transaction. I have already said that in my view, in the context of a #5 million sale of land, a misrepresentation which would have cost #18,000 to put right and was unlikely seriously to have interfered with the development or re sale of the property was a matter of relatively minor importance.
The second matter to which the court must have regard is “the loss that would be caused by it (sc. the misrepresentation) if the contract were upheld.” The section speaks in terms of loss suffered rather than damages recoverable, but clearly contemplates that if the contract is upheld such loss will be compensated by an award of damages. Section 2(2) therefore gives a power to award damages in circumstances in which no damages would previously have been recoverable. Furthermore, such damages will be compensation for loss caused by the misrepresentation, whether it was negligent or not. This is made clear by Section 2(3), which reads as follows:
“Damages may be awarded under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under sub section (2) shall be taken into account in assessing his liability under the said sub section (1).”
Damages under Section 2(2) are therefore damages for the misrepresentation as such. What would be the measure of such damages? This court is not directly concerned with quantum, which would be determined at an inquiry. But since the court, in the exercise of its discretion, needs to know whether damages under Section 2(2) would be an adequate remedy and to be able to compare such damages with the loss which rescission would cause to Cambridgeshire, it is necessary to decide in principle how the damages would be calculated.
The Law Reform Committee drew the analogy with Lord Cairns’ Act and in some respects this analogy is a good one. But it breaks down when one comes to decide the measure of damages. Under Lord Cairns’ Act, the plaintiff who is refused specific performance or an injunction is left to his damages in contract or tort. The measure of such damages is exactly what it would be at common law (see Johnson v. Agnew [1980] AC 367, 400). The only change made by the Act was to give a remedy for purely equitable rights, such as breach of a restrictive covenant to which the plaintiff was not a party. But in such cases the common law analogy enabled a suitable measure of damages to be devised. Section 2(2), on the other hand, creates a power to award damages in a wholly new situation.
Under Section 2(1), the measure of damages is the same as for fraudulent misrepresentation i.e. all loss caused by the plaintiff having been induced to enter into the contract ( Cemp Properties (UK) Ltd v. Dentsply Research and Development Corporation [1991] 2 EGLR 197). This means that the misrepresentor is invariably deprived of the benefit of the bargain (e.g. any difference between the price paid and the value of the thing sold) and may have to pay additional damages for consequential loss suffered by the representee on account of having entered into the contract. In my judgment, however, it is clear that this will not necessarily be the measure of damages under Section 2(2).
First, section 2(1) provides for damages to be awarded to a person who “has entered into a contract after a misrepresentation has been made to him by another party and as a result thereof (sc. of having entered into the contract) he has suffered loss.” In contrast Section 2(2) speaks of “the loss which would be caused by it
(sc. the misrepresentation) if the contract were upheld.” In my view, Section 2(1) is concerned with the damage flowing from having entered into the contract, while Section 2(2) is concerned with damage caused by the property not being what it was represented to be.
Secondly, Section 2(3) contemplates that damages under Section 2(2) may be less than damages under Section 2(1) and should be taken into account when assessing damages under the latter sub section. This only makes sense if the measure of damages may be different.
Thirdly, the Law Reform Committee Report makes it clear that Section 2(2) was enacted because it was thought that it might be a hardship to the representor to be deprived of the whole benefit of the bargain on account of a minor misrepresentation. It could not possibly have intended the damages in lieu to be assessed on a principle which would invariably have the same effect.
The Law Reform Committee drew attention to the anomaly which already existed by which a minor misrepresentation gave rise to a right of rescission whereas a warranty in the same terms would have grounded no more than a claim for modest damages. It said that this anomaly would be exaggerated if its recommendation for abolition of the bar on rescission after completion were to be implemented. I think that Section 2(2) was intended to give the court a power to eliminate this anomaly by upholding the contract and compensating the plaintiff for the loss he has suffered on account of the property not having been what it was represented to be. In other words, damages under Section 2(2) should never exceed the sum which would have been awarded if the representation had been a warranty. It is not necessary for present purposes to discuss the circumstances in which they may be less.
If one looks at the matter when Sindall purported to rescind, the loss which would be caused if the contract were upheld was relatively small: the #18,000 it would have cost to divert the sewer, the loss of a plot and interest charges on any consequent delay at the rate of #2,000 a day. If one looks at the matter at the date of trial, the loss would have been nil because the sewer had been diverted.
The third matter to be taken into account under Section 2(2) is the loss which would be caused to Cambridgeshire by rescission. This is the loss of the bargain at the top of the market (compare The Lucy [1983] 1 Lloyd’s LR 188): having to return about #8 million in purchase price and interest in exchange for land worth less than #2 million.
Having regard to these matters, and in particular the gross disparity between the loss which would be caused to Sindall by the misrepresentation and the loss which would be caused to Cambridgeshrie by rescission, I would have exercised my discretion to award damages in lieu of rescission.
Sindall, of course, claimed to be entitled to damages under Section 2(1) on the grounds that all of some of the alleged misrepresentations were negligent. If Sindall were to succeed on this point, it might be able to establish on the inquiry as to damages that it was entitled not merely to the difference between price and market value at the date of contract, but to the subsequent drop in market value as well. In that case, the award of damages will put Sindall in much the same position as if its rescission and taken effect. But I do not think that the possibility of this result should be anticipated by refusing to exercise the discretion under Section 2(2).
LORD JUSTICE EVANS: This could be a text book case on the law of mistake in contract. The County Council sold 6.71 acres of land, which had been used for nearly 20 years as a school playing field, to a firm of builders who intended to develop an estate of about 70 houses and 30 flats. The sale was duly completed in March 1989 but then the builders’ troubles began. Obtaining detailed planning permission took longer than had been expected, and by October 1990 that process was far from complete. Meanwhile, the value of the land, even with planning permission, had fallen dramatically due to the general decline in market prices. The contract price in 1988 was #5,082,000. The value in 1990 was less than half that figure. The builders had borrowed the whole of the amount which they had paid, and interest rates were high.
Then came the chance discovery in October 1990 of a sewage pipe crossing the land diagonally about two metres below the surface. Because the land had been used as a playing field the manhole which would have revealed its existence had been covered and grassed over. The pipe carried foul sewage, as opposed to surface water drainage, from a neighbouring block of flats owned by the Cambridge City Council. It discharged into a public sewer outside the boundary on the far corner of the site. It also served a building, the Youth Centre, which had been constructed on that part of the site but which would inevitably be demolished in order make room for the housing development planned.
Neither the builders nor the officers of the County Council at the time of the sale knew of the existence of the sewer. The builders seek to set aside the contract and thus to recover the sum of #5,082,000 which they paid in 1989, on grounds of misrepresentation and mistake. The learned judge held that they are entitled to do so, and the Council now appeals, contending that the builders are not entitled to any remedy, or alternatively, that the builders should be restricted to a claim for damages under section 2(1) of the Misrepresentation Act, 1967.
First, mistake. There are certain circumstances in which the courts will hold that an agreement made between two parties, each labouring under a fundamental mistake, is invalid as a contract, that is to say, it has no legal effect. The learned Judge applied the test established by the majority judgments of the House of Lords in Bell v. Lever Brothers [1932] AC 161, as defined by Steyn J. in Associated Japanese Bank (International) Ltd v. Credit du Nord SA [1989] 1WLR 255, and he reached the following conclusion, at page 47:
“…there are undoubtedly important differences between what was contracted for and what was purchased. They do not, as it seems to me, meet the essential test of being essentially and radically different.”
There is no appeal against that finding, or against the learned Judge’s conclusion that the builders failed to establish any common law remedy on the basis of mistake. I would add merely this, that the concept of a factual situation “essentially and radically different” from that by reference to which the parties made their agreement is the same concept, in my view, as that which may lead to frustration of the contract where there has been a change in circumstances due to a supervening event. Before 1956, there was much debate as to the legal basis for the discharge of contracts by frustration, but this was authoritatively settled by the House of Lords in Davis Contractors Ltd v. Fareham UDC [1956] AC 696, and in particular by the speech of Viscount Radcliffe, at page 729:
“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”
The learned Judge proceeded to consider the builders’ claim for rescission on the ground of mutual mistake, that is to say, for the equitable remedy which is available in circumstances like those described by Denning LJ in Solle v. Butcher [1950] 1 KB 671, 692. He found in this context that there was “such a mistake as would entitle equity to order rescission,” at page 51. This implies that the mistake was “fundamental” (per Denning LJ at page 693) and the question arises whether simultaneously the mistake can be fundamental, yet the land not “essentially and radically different” from what it was supposed to be, but it is unnecessary and inappropriate, in my judgment, to consider this issue at this stage, because on any view of the matter, as Mr. Sher QC I think accepts, the first question is whether the contract on its true construction covers the new situation which has arisen by reason of a change of circumstances (frustration) or the emergence of a factual situation different from that which was assumed (mutual mistake). If the scope of the contract is wide enough to cover the new, or newly discovered, situation, then there is no room either for discharge by frustration or for rescission in equity on the grounds of mistake. Put another way, if the agreed terms provide for this situation, then the parties have “allcoated the risk” as between themselves, as Mr. Etherton QC submits that they did in the present case.
Construction
The construction arguments turn upon clause 14 of the National Conditions of Sale (20th edition 1981) and clause 17(e) of the Special Conditions applied to the contract in this case:
“14. Property sold subject to easements, etc.
Without prejudice to the duty of the vendor to disclose all latent easements and latent liabilities known to the vendor to affect the property, the property is sold subject to any rights of way and water, rights of common and other rights, easements, quasi easements, liabilities and public rights affecting the same.
Special Conditions
17. The purchaser shall be deemed to purchase with full notice of, and subject to:
(e) all easements, quasi easements, rights and privileges (whether of a public or private nature) now affecting the Property, but without any obligation on the part of the Vendor to define the same.”
It is common ground that clause 17(e) adds nothing to clause 14 for present purposes and the argument has centres on clause 14 alone.
Reference was made by both counsel to the long history of conveyancing law and practice; by Mr. Etherton QC for the notorious difficulty of proving an unencumbered title to land, registration apart, and Mr. Sher QC for the distinction drawn between defects in title which the vendor has himself created or suffered by his own act, and others which he inherited from his own predecessors, but these considerations provide only slender grounds for qualifying the apparently clear words of Clause 14, unless it be on the basis that something akin to the frustration test applies. But that test involved a situation emerging which is essentially and radically different from what both parties mistakenly envisaged when the contract was made, and Mr. Sher’s main authority (Jackson v. Union Marine Insurance Co. Ltd [1874] LR 10 CP 125) was a case of that type. Here, the learned Judge’s finding, which the appellants accept, is fatal to that submission, and it follows in my judgment that the attempt to limit the scope of condition 14 as a matter of construction must also fail.
A supplementary issue raised by Mr. Sher QC under this head involved the proposition that, on the facts of the present case, the defect in title was not an easement, properly so called, but rather an adverse property right. The City Council, he submitted, had title to the sewer pipe and the ground space occupied by it, acquired by adverse possession against the County Council from 1972. Therefore condition 14 relating to easements etc. does not apply. In my judgment the property claim fails; and in any event the essential difficulty was not the physical presence of the pipeline, which it was not suggested before us would cause any serious disruption of the builders’ development plans, but rather its continued use by the City Council for foul sewer drainage from its Greystoke Court property. That use was claimed as of right, notwithstanding the City Council’s failure to declare the pipeline as a public sewer under section 20 of the Public Health Act 1936, and the right so claimed does constitute an easement to which condition 14 applies.
Subject, therefore, to the claims for rescission based on actionable misrepresentation, the contract for sale as a matter of construction requires the builders to accept the property notwithstanding the presence of the pipeline and the City Council’s easement.
Misrepresentation
I entirely agree with the judgment of Lord Justice Hoffmann, and it is unnecessary for me to repeat any of its contents here. I add only one footnote with regard to the definition of the County Council’s knowledge for the purposes of its answer to Enquiry No. 7. It was not suggested that the responsible officers had any personal knowledge of the existence of the sewer and of the City’s easement in 1988/89 when the representation was made and the land was conveyed, nor of the exchanges which took place between the City and the old County Council, Cambridge and Ely, between 1970 and 1974. The question is not, however, whether these individuals knew but whether “the Vendor”, meaning the Council, did. If, contrary to our view, Cambridge and Ely was not the predecessor in title of the defendants, and “the Vendor” therefore includes the old Council, then the answer to Enquiry No. 7 was tantamount to saying that the County Council was not aware in 1989 of facts which certainly were known to it in 1974. I should not like our decision in this case to be taken as approving either corporate forgetfulness or collective amnesia of this sort. Applied in the case of a commercial organisation, and with regard to corporate knowledge, questions as to the adequacy of records etc. might well arise. But these questions do not arise here, because Mr. Sher for the respondents accepts that the judge stated the correct test in law for the purposes of the present case: (Judgment, page 66):
“In approaching the present case what I get from the authorities is this, that knowledge may go beyond what is in somebody’s head, that it requires a solicitor to read his file and to read it properly and to make (because his side has the advantage in terms of knowledge) reasonable and prudent investigation of the grounds upon which any belief is stated. This is, of course, of the greatest importance where the vendor is, as here, a corporate body with changing staff. Very little is likely to be in anybody’s head at the critical time. Perhaps one could say that in these sort of circumstances there are three possible types of information: (a) information in somebody’s personal memory, (b) information which is in the files, and which the reasonable and proper investigations of a conveyancing solicitor when preparing his title for sale will reveal, and (c) other information which was either in an individual’s memory and has been forgotten, or is in a file which the ordinary and prudent conveyancer’s inquiries will not reveal. Of these I consider that (a) and (b) will amount to knowledge for the purpose of the answer under consideration and (c) does not.”
This sets the stage for the further analysis in Hoffmann LJ’s judgment, and as stated above I respectfully agree with his reasoning and conclusions in the circumstances of this case.
Equitable mistake
Logically, there remains the question whether the contract, notwithstanding that on its true construction it covers the situation which has arisen, and that it cannot be set aside for misrepresentation, nevertheless may be rescinded on the ground of equitable mistake, as defined by Denning LJ in Solle v. Butcher [1950] 1 KB 671, 692. It must be assumed, I think, that there is a category of mistake which is “fundamental” so as to permit the equitable remedy of rescission, which is wider than the kind of “serious and radical” mistake which means that the agreement is void and of no effect in law: see Chitty on Contracts (26th edition) Volume 1, paragraph 401; Treitel, The Law of Contract (8th edition) page 276; and Cheshire Fifoot and Furmston’s Law of Contract (11th edition) page 245). The difference may be that the common law rule is limited to mistakes with regard to the subject matter of the contract, whilst equity can have regard to a wider and perhaps unlimited category of “fundamental” mistake. However that may be, I am satisfied that the learned Judge’s finding in the present case was vitiated by his assumption that the presence of the sewer and of the City’s easement had serious consequences for the proposed development, even if the sewer was incorporated into the public sewer that was envisaged for the development itself (Option 2A). This would not involve the loss of seven houses and three flats, as the judge appears to have thought (Judgment, page 32), but, at most, of one three bedroomed house. The additional cost of the alterations to the sewer would not have exceeded about #20,000. Given the breadth of the contract terms, in particular Condition No. 14, which on its face was intended to cover precisely such a situation as this, and the relatively minor consequences of the discovery of the sewer, even if some period of delay as well as additional cost was involved, it is impossible to hold, in my judgment, that there is scope for rescission here.
Rescission or damages
Our finding that the builders are not, and were not, entitled to rescind the contract, as they purported to do, makes it unnecessary for us to decide the issue raised under section 2(2) of the Misrepresentation Act 1967, that is, whether in the present case it would be “equitable”, notwithstanding the actionable misrepresentation, “to declare the contract subsisting and award damages in lieu of rescission.” The issue, however, was argued before us (though Mr. Etherton QC was not called upon to reply) and like Hoffmann LJ I consider that if it had been necessary for us to review the learned Judge’s exercise of the discretion, then we would have been; indeed, bound, to do so.
Section 2(3) makes it clear that the statutory power to award damages under section 2(2) is distinct from the plaintiff’s right to recover damages under section 2(1). Quoting from section 2(2) itself, such damages are awarded “in lieu of rescission” and the court has to have regard to three factors in particular, namely, the nature of the misrepresentation, the loss that would be caused by it (sc the misrepresentation) if the contract were upheld, and the loss that rescission would cause to the other party (sc the non fraudulent author of the misrepresentation).
It has not been suggested that these three are the only factors which the court may take into account. The discretion is expressed in broad terms “If of opinion that it would be equitable to do so.” The three factors, however, in all but an exceptional case, are likely to be the ones to which most weight would be given, even if the sub section was silent in this respect.
No real difficulty arises in the present case as regards the nature of the misrepresentation, if any was made, nor as regards the loss which would be caused to the Council, if rescission was upheld. There was no blameworthiness, on the judge’s findings, so far as the Council’s officers in 1988/89 were concerned. The fault, if there was any, lay in their predecessors’ failure to note the title deeds in 1970. The consequences of the misrepresentation were not negligible, but they were small in relation to the purchase and the project as a whole. The loss caused to the Council by rescission would be very great. They would repay in excess of #5 million, together with interest, and would have restored to them land worth only a fraction of that amount. In other words, they would suffer the decline in market values which has occurred since 1988. And, even if the easement had been discovered immediately and the contract had been rescinded then, the Council would have suffered significant loss, simply by reason of the need to repeat the tendering process and find another buyer.
There is, however, much room for debate as to the “loss that would be caused if the contract were upheld.” The sub section assumes, as I read it, that this loss will be compensated by the damages awarded, if the contract is upheld. But if the measure is the same as those awarded in respect of a fraudulent misrepresentation (Doyle v. Olby Ltd [1969] 2 QB 158), or under section 2(1) (Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297), in cases where the contract continues in force, then two consequences seem to follow. First, damages under section 2(2) are co extensive with those under section 2(1), whereas section 2(3) suggests that they are, or may be, different. Secondly, an innocent and non negligent defendant will be liable under section 2(2) for damages which he is specifically excused under section 2(1). Furthermore, if the plaintiff recovers full compensation under section 2(2), if the contract is upheld, then he will not suffer any net loss, assuming that the damages are paid.
The cost of remedying the defect in the land was almost insignificant, and any delay and inconvenience suffered by the builders can be compensated by a relatively small additional sum. The real issue is whether account should be taken of the decline in market values which affects the builders if the contract stands, just as it would affect the Council if rescission was upheld.
Mr. Sher asserts that the builders would not have entered into this contract, nor would they have purchased any other developed land if the existence of the sewer had not been concealed from them. I will assume that this is correct and a fair reflection of the evidence, although I should also express my doubts. The builders went to great lengths to make the purchase. They commenced judicial review proceedings in order to assert their right to buy, and they knowingly paid a price equivalent to the highest which the tendering process had produced; substantially higher, in fact, than had emerged from the initial round. To say that they would have been deterred at that stage from surmounting the obstacle presented by the sewer seems to make a major assumption in their favour. Nevertheless, I will make it in order to consider the issue which Mr. Sher has addressed.
His argument is that the builders are entitled to recover the whole of the loss which they have suffered as a result of entering into the transaction, including the fall in market values from 1988 until at least the time of purported rescission in December 1990. The judgments in Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297
appear to be against this submission, even as regards a claim under section 2(1), because there the judge had found that the buyers, but for the misrepresentation, would not have purchased the property (page 199K), and the Court of Appeal, without altering that finding, held that the measure of damages was the difference between market values (per Bingham LJ at 201G), or the difference between the contract price and the actual market value (Per Sir Nicolas Browne Wilkinson V.C. at 200J), in both cases as the time when the contract was made.
If that applies in the present case, then the builders cannot include the subsequent decline in market values in their loss. But it may be said that the case should be distinguished from the present because no claim for rescission was involved. (See page 198B). I therefore proceed to consider as a matter of principle whether the builders are entitled to contend that the decline in market value forms part of their loss caused by the alleged misrepresentation for the purposes of section 2(2), upon the factual assumption that Mr. Sher has invited us to make.
In my judgment, it is not correct that the measure of damages under section 2(2) for the loss that would be caused by the misrepresentation if the contract were upheld is the same measure as under section 2(1). The latter is established by the common law, and it is the amount required to compensate the party to whom the misrepresentation was made for all the losses which he was sustained by reason of his acting upon it at the time when he did. But the damages contemplated by section 2(2) are damages in lieu of rescission. The starting point for the application of the subsection is the situation where a plaintiff has established a right to rescind the contract on grounds of innocent misrepresentation; its object is to ameliorate for the innocent misrepresentor the harsh consequences of rescission for a wholly innocent (meaning, non negligent as well as non fraudulent) misrepresentor, in a case where it is fairer to uphold the contract and award damages against him. Such an award of damages was not permitted in law or equity before 1967. The court, therefore, exercises a statutory jurisdiction, and it does so having regard to the circumstances at the date of the hearing, when otherwise rescission would be ordered. (The subsection envisages that the court’s order may restore a contract which has been lawfully rescinded by the innocent party at some earlier date (see The Lucy [1983 1 Lloyd’s LR 188, 202. per Mustill J.) When there has been a decline in market values since the date of the contract, then one party or the other will suffer that loss, depending on whether rescission is ordered or not. But that loss is not caused by the misrepresentation, except in the sense that the decline has occurred since the representation was made and it does not measure the loss caused by the misrepresentation either when the representation was acted upon, or when the court decides whether to order rescission or not. The “loss caused by it”, in my judgment, can be measured by the cost of remedying the defect, or alternatively by the reduced market value attributable to the defect, together with additional compensation, if appropriate, of the kind described in Cemp Properties (UK) Ltd v. Dentsply etc. [1991] 2 EGLR 196; cf. Royscot Trust Ltd v. Rogerson [1991] 2 QB 297.
When the court is required to form its own view of what is equitable between the parties at the date of the hearing, it is dangerous to lay down any hard and fast rule to the effect that no account can be taken of changed market values. Apart from the capital value of the subject matter of the contract, as here, which might rise or fall due in the intervening period, there might be relevant market trading conditions which the court could properly take into account: cf. The Lucy [1983] 1 Lloyd’s LR 188, 202. Moreover, if it is right to take account of the current market value in assessing the loss which would be sustained by the Council, if rescission was ordered, then it would be “inequitable” not to have regard to this factor in the case of the builders also. But the effect of doing so is merely to re state the issue which the court has to decide: in the circumstances of the case, should the loss of market remain where it presently lies?
Viewed this way, it would be substantially unjust, in my judgment, to deprive the County Council of the bargain which it made in 1988, albeit that the bargain was induced by a misrepresentation innocently made, but which was of little importance in relation to the contract as a whole. That misrepresentation apart, the builders made what has proved to be so so far an unfortunate bargain for them (although they remain owners of an important potential development site in what is a notoriously cyclical market). To permit them to transfer the financial consequences to the Council, in the circumstances of this case, could properly be described as a windfall for them.
For the above reasons, and taking into account the nature of the alleged representation and the history of the matter generally, including the builders’ deliberate failure to make any serious attempt to find a solution to the difficulty which arose when the sewer was discovered, the equitable balance, in my judgment, lies in favour of upholding the contract and awarding damages in lieu of rescission in this case. If there was a live issue under section 2(2) I would award damages in lieu of rescission and order the amount of such damages to be assessed.
There remains the question of whether these damages should include the decline in the market value of the land since the contract was made. As indicated above, in my judgment they should not. This conclusion may be inconsistent with the view expressed in McGregor on Damages (11th edition) paragraph 1752, and in defence to the distinguished author I should explain my reasons briefly. He suggests that the measure to be adopted is:
“the same as the normal measure of damages in tort where the plaintiff has been induced to contract by fraudulent or negligent misrepresentation…the overall result, therefore, is that the damages will be held to be the difference between the value transferred and the value received…no recovery being possible for consequential losses.”
If the “value transferred” (meaning the price paid by the plaintiff, to whom the representation was made) was the market value of the property, then there is no difference between this formula and what McGregor calls the contract measure, that is to say, the difference between the actual value received and the value which the property would have had, if the representation was true (see paragraph 1718). By adopting the tort measure, therefore, as he does in paragraph 1752 in the paragraph already quoted, the learned author impliedly rejects the contract measure, whereas in my judgment that becomes the correct measure in circumstances where the plaintiff is entitled to an order for rescission, but rescission is refused under section 2(2) of the Act. This is because the difference in value between what the plaintiff was misled into believing that he was acquiring and the value of what he in fact received seems to me to be the measure of the loss caused to him by the misrepresentation in a case where he cannot rescind the contract and therefore retains the property which he received.
As McGregor points out, the tortious measure benefits a plaintiff who made a bad bargain, that is to say, who agreed to pay more than the market value of the property in the state in which he believed it to be, more so than the contract measure would do. Conversely, it disbenefits one who paid less than the market value, because it disentitles him from recovering the whole of the difference which the contract measure would otherwise produce. Likewise, the right to rescind benefits a plaintiff who has paid, or agreed to pay more than, with hindsight, he should have done. The period of hindsight may be short or long; where it is long, and the value has fallen in line with the market and therefore for reasons unconnected with the misrepresentation, there is no justification, in my view, for holding the author of the misrepresentation liable to compensate the plaintiff for that loss, in a case where rescission is refused.
It is unnecessary to explore the wider questions whether a tortious measure should ever include damages for a fall in market values, and whether this measure, as described by Lord Denning MR, in Doyle v. Olby (Ironmongers) Ltd, [1969] 2QB 158, 166, is necessarily exclusive of, or inconsistent with, the contractual measure to the extent which has been suggested. The recovery of such damages in the present case, even if the tortious measure under section 2(2) applies, appears to be barred by the following three obstacles:
(1) such damage was caused, not by the misrepresentation, but by the subsequent fall in market values, an extraneous cause;
(2) the authorities suggest that the plaintiff’s loss has to be assessed at the date when the property was transferred: McGregor, paragraph 1727, citing Waddell v. Blockley, [1879] 4 QBD 179, and
(3) if a subsequent rise, or fall, in market values is relevant at the date of trial, then a chance element enters into the calculation, whether the contract is rescinded or not.
I should add, however, that the reported authorities are sparse, as McGregor emphasises, and as I read them they do not purport to decide the question whether a decline in value until the time of discovery of the true facts is necessarily excluded.
It is sufficient for present purposes to say that an award of damages in lieu of rescission under section 2(2) should in my view be calculated as I have described above.
For these reasons, as well as those given by Hoffmann LJ, I would allow this appeal.
Irish Cases
Pat O’Donnell & Co. Ltd. v. Truck and Machinery Sales Ltd.
[1998] 4 IR 191
O’Flaherty J.
Was there a negligent misrepresentation at common law? The duty of care expected in regard to innocent but negligent misrepresentation was crystallised in the decision of the House of Lords in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, and which decision was followed in our jurisdiction for the first time by the High Court (Davitt P.) in Securities Trust Ltd. v. Hugh Moore & Alexander Ltd. [1964] I.R. 417. Davitt P. defined the context in which liability may arise as follows at p. 421:-
“. . . circumstances may create a relationship between two parties in which, if one seeks information from the other and is given it, that other is under a duty to take reasonable care to ensure that the information given is correct, . . .”
Denning M.R. put it thus in Esso Petroleum v. Mardon [1976] Q.B. 801 at p. 820:-
“. . . if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another – be it advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages.”
The old law was that the only remedy for an innocent misrepresentation was recission of the contract. It seems to me that the concept of negligent common law misrepresentation is much more relevant to a situation where the parties involved do not enter into contractual relations with each other but that the party to whom the representation has been made perhaps enters into contractual relations with someone else, or alters his position to his detriment in some other way. If the parties to the negligent misrepresentation subsequently do enter into an actual contract with each other, then I do not see the necessity for the Hedley Byrne principle arising at all because in that event one has s. 45 of the Sale of Goods and Supply Services Act, 1980, to cover the matter.
In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, the party who was misled by the alleged negligent advice did not contract with the bank giving that advice but pleaded that he did act on the advice to his detriment. In Securities Trust Ltd. v. Hugh Moore & Alexander Ltd. [1964] I.R. 417, once again, the parties giving and receiving the erroneous information did not enter into a contract with each other: the recipient of the erroneous memorandum and articles of association went and bought preference shares in the market to its detriment.Cf: judgment of Keane J. in Doolan v. Murray (Unreported, High Court, Keane J., 21st December, 1993).
Therefore, I can see a use for the concept of negligent misrepresentation in cases where an actual contract between the representor and representee is not subsequently entered into, but I cannot see any real use for that concept at all once an actual contract is subsequently entered into between the two parties because the statutory condition about misrepresentation then surely takes over.
To come then to the allegation that there was a statutory misrepresentation. Section 45 of the Sale of Goods and Supply of Services Act, 1980, provides:-
“(1) 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 person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person 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.
(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed in any proceedings arising out of the contract that the contract ought to be or has been rescinded, the court may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.
(3) Damages may be awarded against a person under subsection (2) whether or not he is liable to damages under subsection (1), but where he is to so liable any award under subsection (2) shall be taken into account in assessing his liability under subsection (1).”
Here the only representation that is germane to what we have to decide was that the L150 was as good as or better than the Caterpillar 966. It is not in dispute, as already stated, that that is so: in regard to some tasks better, in regard to other tasks, not as good. The representation was not that the L150 would be identical to the Caterpillar; it was that it would be as good as or better. That must admit to a margin of both appreciation and derogation.
In this context, it is also relevant to consider the finding of the trial judge that no serious or adequate warning was given by or on behalf of the vendor regarding the unsuitability of the larger tyres. Specifically, was the vendor under any duty to provide such a warning? Or, viewed alternatively, can it be said that the silence of the vendor constituted a misrepresentation?
In general, mere silence will not be held to constitute a misrepresentation. Thus, a person about to enter into a contract is not, in general, under a duty to disclose facts that are known to him but not to the other party. However, in certain circumstances, such a party may be under a duty to disclose such facts. A duty of disclosure will arise, for example, where silence would negate or distort a positive representation that has been made, or where material facts come to the notice of the party which falsify a representation previously made.
Could it be said that the absence of an adequate warning in this case constituted a misrepresentation on the part of the vendors? To succeed in this regard, the “silence” of Mr. O’Donnell must actually have distorted the positive representations that he made regarding the comparability of the L150s to the Caterpillars. Clearly, it did not so distort the representation made. The matter of the necessity or not for a warning is something totally divorced from such representation as was made. The plaintiff could only be liable for such an omission if it had vicarious responsibility and patently this is not so.
Northern Bank Finance v. Charlton
[1979] IR 149
O’Higgins C.J. 185
S.C.
Rescission
There were two transactions which the President held to have been affected by fraudulent representations for which the plaintiffs are responsible. The first of these was the agreement between the plaintiffs and the five promoters for the financing of the take-over of Mooney. This involved the subscription by the promoters from their own resources of £500,000 in agreed shares and the granting of a loan by the plaintiffs; the actual operation was to be carried out by the plaintiffs through a holding company, called Pat Quinn Holdings Ltd., to which subscriptions and loan were to be credited. The agreement required that the plaintiffs’ loan be secured by the share capital and assets of the holding company with, as collateral, joint and several guarantees from the five promoters, the pledging of the personal assets of the defendants and of the entire assets of I.T.G. Ltd., a company owned by the second and third defendants. Having been induced to enter into this transaction by the fraudulent misrepresentation of the plaintiffs’ agents, the defendants did not become aware of the fraud until some years had elapsed. When the defendants discovered the true facts, not only had the take-over of Mooney been completed and the purchase by them of Patrick Quinn’s share taken place but, in addition, the apparent or market value of the original investment had evaporated and it had become worthless.
The second transaction into which the defendants were induced to enter by the fraudulent misrepresentation of the plaintiffs’ agents was the purchase by them of Patrick Quinn’s shares in the holding company. These two transactions involved the first defendant in a total expenditure of £72,378.11 and they involved the second and third defendants in an expenditure of £344,757.10.
Can these transactions be rescinded? The plaintiffs say that they cannot be rescinded because, in the events which have happened, “an egg has been scrambled which cannot be unscrambled.” They say that restitutio in integrumis an essential requirement for rescission and that it is now impossible. They point to the fact that, in pursuance of the original project, Mooney shares have changed hands and, through the agency of the plaintiffs, have become the property of Pat Quinn Holdings. To endeavour to rescind in such circumstances would be impossible because it would result in a situation in which the plaintiffs would end up owning shares which they never previously owned in a business which had nothing to do with banking.
It is also said that rescission is not now possible because the shares are now valueless and that this was caused and brought about by the actions and decisions of the promoters, including the defendants, after the take-over had succeeded. In this respect reliance was placed on the decision taken by the new board of Mooney that the company would purchase the property holding of I.T.G. Ltd. The decision was also to the effect that out of the proceeds of that sale I.T.G. Ltd. would invest £300,000 in Pat Quinn Holdings. This decision was said to be the cause of Mooney shares not obtaining a re-quotation on the stock exchange and thus led to the financial collapse of the enterprise. Whether the decision had this effect or not is not relevant because it is not the subject of these proceedings. What is relevant, however, is that after the take-over and as a result of this decision the second and third defendants invested, through I.T.G. Ltd., another £300,000 in the holding company. That entire investment, with other monies so invested, is now valueless.
I have considered very carefully whether in the circumstances of this case the legal principles which I have mentioned can be applied and whether, accordingly, relief in the nature of rescission can be given. In my view, such principles do apply and such relief can be given. It seems to me that it is the bounden duty of the Court to do what is practically just”this being a case of fraud”even though the precise restoration of the parties to their previous position is not now possible.
The transactions involved, in the first instance, the plaintiffs financing and purchasing, as agents for the promoters, whatever Mooney shares were obtainable. Were it not for the fraudulent misrepresentations which were established, the defendants would not have been involved in this transaction at all. It cost them, initially, their investment; this they should get back. That form of rescission is at least possible. The plaintiffs, having dealt with shares on a representation with regard to a particular stake and particular stakeholders which was untrue and fraudulent, cannot complain if they are now left holding these shares. Nor can they complain that the shares are now valueless. In my view, in this respect, this case is similar to Armstrong v.Jackson. 37
Again, the plaintiffs having instigated the purchase by the defendants of Patrick Quinn’s shares and having induced the defendants to proceed with such purchase by further fraudulent representations, ought to be ordered to repay what they received or caused to be paid by the defendants as a result of such transaction.
There remains the purchase of the property holding of I.T.G. Ltd. by Mooney and the consequent further investment in Pat Quinn Holdings of £300,000 by the second and third defendants. This investment, unlike the others, was not triggered off by any of the representations complained of. It was, however, made in the full knowledge of the plaintiffs’ officers and with their agreement on behalf of the plaintiffs. For this reason the plaintiffs can scarcely be heard to suggest that this additional investment was a non sequitur so far as the misrepresentation was concerned. It was made by two people whom they had induced to enter into the transaction and was made with their knowledge and approval at a time when these two people were still the victims of deception as to what the real participation and stakeholding was in the transaction in which they were involved. It would seem to me to be in accordance with what is practically just to order that the plaintiffs, who knew of and encouraged this investment in a holding company, the assets of which were already pledged to them, should be ordered to repay such sums to those who were so encouraged to invest.
It follows also that the form of appropriate rescission which seems to be both possible and just in this case requires also the cancelling of all guarantees and pledges given by the defendants and their indemnity by the plaintiffs in respect of promissory notes executed by the defendants at the behest of the plaintiffs. In short, it seems to me that the various orders and declarations made by the President represent as effective a means as can be found to undo the wrong done to the defendants by the fraudulent misrepresentations which induced the transactions. These orders and declarations also represent as effective a means as possible to bring about such form of rescission as can be obtained in the circumstances of this case. I would, therefore, affirm the order made by the learned President.
As I am aware that the views which I have expressed on the availability of rescission as a relief in this case are not shared by a majority of my colleagues, I think it proper to add something on the subject of damages. If rescission be not the appropriate remedy, then the question must be what damages have been suffered as a result of the wrong or tort of deceit. By reason of the view taken by the President as to the appropriateness of rescission as a remedy, this aspect was not considered by him. If it is to be considered and examined at a further stage in these proceedings then, in my view, the enquiry should be as general as the law permits. The measure of damages for the tort of deceit is the actual loss flowing directly from the fraud. I adopt in this respect the views of Lord Atkin in Clark v. Urquhart 39 at p. 68 of the report. Such damages can cover consequential loss. This is a matter of proof. Clearly in this case this may be a matter of some complexity. The damage flowing from the original inducement to engage in the take-over may well be different in kind and degree from that flowing from the inducement to purchase Patrick Quinn’s shares. Whether or not it is different will depend on the evidence that may be adduced. Since no evidence has been adduced and since there are no findings on this aspect of the case, in my view it would not be proper for this Court to say in what way the damages in either case ought to be limited. If the case is to be remitted to the High Court to have damages assessed, I will express no opinion other than to say that the measure of damages should be the loss flowing directly from the tort.
Henchy J.
In dismissing the claim of the plaintiff bank and holding with the defendants in their counterclaim, Mr. Justice Finlay held that the bank had been guilty of fraudulent misrepresentation. In the course of coming to that conclusion he found that the bank, knowing it to be false, represented to the defendants that, for the purpose of the take-over of J. G. Mooney & Co. Ltd. by Pat Quinn Holdings Ltd., Patrick Quinn had lodged in the bank the amount of the contribution which it had been agreed he would make towards the cost of the take-over; that that representation was material to the defendants’ participation in the take-over; and that the defendants were induced, as was intended, by that representation to proceed with the take-over.
Those findings of fact were necessary for the judge’s determination that the bank was guilty of fraud. In this appeal, which has been taken by the bank against the order made in the High Court, it has been contended on behalf of the bank that the evidence was such that it was not open to the judge to make those findings. Counsel for the bank therefore strongly contest the finding of fraud. Much of the argument on the hearing of the appeal has been occupied with a forceful and meticulous investigation of the evidence, by counsel on both sides, aimed at rebutting or supporting the judge’s findings of fact on which fraud on the part of the bank was held to have taken place.
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When an agent-adviser (such as a solicitor, banker, stockbroker, architect, auctioneer or estate agent) induces a client or customer, by means of a fraudulent misrepresentation, to purchase property from a third party, and when the purchaser, having completed the purchase and acquired ownership of the property, discovers the fraud, then I understand the law to be that the remedy of the purchaser lies in damages and not in rescission. The reason is that, in such circumstances, as between the agent-adviser and the purchaser there is no form of rescission and restitution which could restore, even substantially, the status quo ante” being the respective positions of the parties before the fraudulent misrepresentation was acted on to the purchaser’s detriment. An order such as was made in this case (binding the misrepresentor to acquire the property which was bought on foot of the misrepresentation and to pay the purchase price to the misrepresentee) so far from restoring the status quo ante results in a situation which never before existed. In this case the return of the purchase money might be said to restore the purchasers’ former position, but the compulsory subrogation whereby the misrepresentor would be required to step into the purchaser’s shoes and take over the ownership of the property bought, which the misrepresentor had never owned, would have the effect of thrusting on the misrepresentor a wholly new factual and legal situation which would be incompatible with the mutuality and fairness inherent in the concept of restoring the status quo ante. Counsel for the defendants are unable to point to any judicial precedent for such an order.
Where a person has been induced by a fraudulent misrepresentation made collaterally by the other party to a contract to alter his position to his disadvantage, there are two alternative courses open to him: he may claim damages in tort for the deceit or he may sue for rescission of the contract which was induced by the misrepresentation. The latter relief, which is an equitable one, will be granted when the court considers that it would be just and equitable to do so in order to restore the parties, at least substantially, to their respective positions before the fraudulent misrepresentation was acted on. That is the relief which the defendants have chosen primarily in their counterclaim, and it is the relief which the order of the High Court purported to give them. But, be it noted, the restitutio in integrum by restoring the status quo ante (which is the object of this form of relief) can be granted only as an adjunct to the rescission of the contract between the parties. In this case the defendants sought and were granted rescission of the contract between the defendants and the bank but, in an effort to restore the status quo ante, the court went further. By requiring the bank to take the place of the defendants in each of the many instances of the purchase of shares, the court purported to rescind and amend executed contracts which had been made between the defendants and third-party vendors of shares who were not before the court. In my opinion, that is something which the court had no jurisdiction to do.
Since the purpose of the rescission of a contract on the ground of misrepresentation is the restoration of the status quo ante on the ground that the voidable contract is to be deemed wholly void ab initio, each side must divest itself in favour of the other of what it has received under the contract. As Bowen L. J. put it in Newbigging v. Adam 40 at p. 595 of the report, there ought to be “a giving back and a taking back on both sides.” Now, in the present case, the order of rescission made in the High Court cannot operate in that way. The moneys which it requires the bank to repay to the defendants are not moneys which it received, in any permanent or beneficial sense, under the contract with the defendants. Those moneys only passed through the bank’s hands on their way to the vendors of the shares in question. It was those vendors who really received those moneys under the contract. So the bank cannot, by way of rescission, be compelled to repay them to the defendants. But, even more radically, the order of rescission, in requiring the bank to take up all the shares purchased by them for the defendants, runs counter to the object of the restoration of the status quo ante.The compulsory acquisition by the bank of those shares could not be said to be a “taking back” since the bank had never owned those shares. If effect were to be given to the order of rescission made in the High Court, the bank (which, as far as one can gather from the evidence, was never the beneficial owner of a single Mooney share) would become the unwilling owners of over 900,000 shares in that company. Clearly an order of rescission with that result could not be said to restore the status quo ante.
Counsel for the defendants, in arguing in support of the order of rescission made in the High Court, have been unable to refer to any case in which such a result was produced. The authority they rely on most is Armstrong v. Jackson 37 but, in my view, that decision defeats the argument for the defendants. In that case, the plaintiff had engaged the defendant stockbroker to buy 600 shares in a company. In purported execution of that order, the defendant sent to the plaintiff a contract note showing that the shares had been purchased for him at a specified price. The plaintiff allowed some time to elapse before taking up the shares and, during that time, the value of the shares dropped. Nevertheless, the defendant advised the plaintiff to complete the purchase and he did so. Some four years later, the plaintiff obtained information which caused him to issue proceedings seeking rescission of the transaction or, in the alternatives, damages. In the course of the hearing it was shown that, at the time of the purchase, the defendant was theowner of the shares ” a fact which he had fraudulently concealed from the
plaintiff. In granting an order of rescission, under which the defendant was required to repay all sums received by him from the plaintiff (less a credit for the amount of a dividend paid to the plaintiff) and the plaintiff to transfer the 600 shares to the defendant, McCardie J. said at p. 823 of the report:” “From first to last the defendant made no disclosure whatever to the plaintiff as to the true facts. He purported to act as a broker, whereas he was really acting as a principal.” Therein lies the basis of the rescission granted in that case: the fact that the stockbroker, being the owner of the shares, was really acting as principal. It is inherent in the decision that, if the defendant had not been the owner of the shares and had been merely an agent (which was the position of the bank in the present case), rescission would not have been granted since the mutual repayment of money and re-transfer of shares would not have accorded with the status quo ante. Instead, there would have been a decree for damages.
In my opinion, the order of rescission made in the High Court, and the orders consequential and ancillary thereto, should be set aside.
Damages
In their counterclaim the defendants have pitched their claim for damages in comprehensively wide terms but, in view of the judge’s specific finding that they were induced by the enumerated misrepresentations, in their separate and cumulative effect, to buy the Mooney shares and Patrick Quinn’s shares in Pat Quinn Holdings, they are confined in this action to a claim for damages for the tort of fraud or deceit in that respect. While it is said that the measure of damages for breach of contract is the amount of money necessary to put the damnified person in the position in which he would have been if the contract had not been broken, the claimant in tort is entitled, by an award of damages, to be notionally restored to the position in which he would have been if the tort had not been committed. As far as the tort of fraud or deceit is concerned, it is well settled that the measure of damages is based on the actual damage directly flowing from the fraudulent inducement, and that the award may include, in an appropriate case (of which this may not be an example), consequential damages representing what was reasonably and necessarily expended as a result of acting on the inducement: Doyle v. Olby Ltd. 41
In this case the defendants were induced by the deceit to purchase shares, of which the plaintiff bank was not the owner. It is well established by judicial authority that the correct measure of damages in such a case is the cost of acquiring the shares, less their actual value at the time of acquisition: see Twycross v. Grant 42 ; Peek v. Derry 20 ; Broome v. Speak 43 ; and the cases referred to in McGregor on Damages (13th edn.) at paragraphs 1363-4. The price paid for the shares is to be regarded only as evidence of their value and not as proof of it (per Lord Coleridge C.J. in Twycross v. Grant 42 ), so it will be for the court to make a true and fair valuation of the shares as they stood when they were transferred to the defendants or their nominees; that is the crucial time for the assessment of their value. Subsequent fluctuations in their value, from whatever cause, may be taken into reckoning for that purpose only to the extent that such movements in value may throw light on their real value at the time they were transferred to the defendants. As Cotton L.J. put it in Peek v. Derry 20 at p. 592 of the report:””Nor do I think he [the plaintiff] ought to be precluded from taking into account the subsequent events. Although the value of the shares is not to be ascertained at the subsequent period so as to take into account for the benefit of the Plaintiff events subsequent which depreciated their value, yet those events, if they shew that the company was originally, with the capital which it had got, a company which was worthless, may, in my opinion, be taken into account as evidence of what was the value of the shares immediately after they were allotted to the Plaintiff.”
Because the trial judge considered that the defendants’ remedy lay in rescission, there was no adjudication in the High Court of the question of the measure of damages and of their assessment. Therefore, there is no judicial determination of the correct amount which each of the defendants may be said to have laid out in the purchase of the shares which were transferred to him or his nominee, nor is there any judicial finding as to the true value of those shares at the time of such transfer. Because the measure of damages will be the difference between those two figures, and because the defendants failed to adduce at the trial the evidential data which would enable those figures to be computed, it is not possible for this Court to assess the damages.
Therefore, I would remit the case to the High Court to have the defendants’ damages assessed on the basis I have indicated.
Carbin v. Somerville
[1933] IR 276
FitzGibbon J. 288
Supreme Court
We have not been referred to any decision of any Court, or to any opinion of any reputable text-writer, to the effect that when a party to a contract has been induced to enter into it by fraudulent misrepresentation he loses his right to repudiate it on discovery of the fraud because the subject matter cannot be restored to the defendant in the identical condition in which it was at the date of the contract, where the alteration is due to the nature of the subject-matter itself and cannot be attributed to any act of the plaintiff. In Adam v. Newbigging (1) the House of Lords, Lords Halsbury, Watson, FitzGerald and Herschell, considered that the circumstance that the business, in which the plaintiff had been induced to become a partner by the misrepresentation of the defendants made without any fraud on their part, had become totally insolvent and worthless between February 1st, 1883, the date of the contract, and November, 1884, the date of the commencement of proceedings for rescission, did not disentitle the plaintiff to rescission and repayment of his capital although the defendants could not recover against him for money lent and goods sold by them to the partnership during the interval. It was held unanimously that the mere deterioration of the business, though it might have been anticipated if the plaintiff had known the actual state of affairs in the beginning of 1883, could not stand in the way of the plaintiff’s claim for mutual restitution, and that was a case of innocent misrepresentation only. The present defendant sold the plaintiff a defective house, by fraudulent misrepresentation as to its condition. He will get back his own defective house, which has deteriorated since he sold it through its own inherent vice, and has not been depreciated by any act of the plaintiff, who has simply refrained from spending any more of her own money upon the defendant’s house in a vain endeavour to make it what he contracted to sell her.
Having arrived at a clear determination that the plaintiff is entitled to rescission of her contract and the return of her purchase money upon the ground that the contract was induced by the fraudulent misrepresentation of the defendant, it is unnecessary to consider the question, to which the greater portion of the time occupied by the appeal was devoted, whether the plaintiff could recover damages for breach of warranty. The question was not dealt with specifically by the learned Judge in his decision, but we have been asked to infer from his dismissal of the action that he held that no warranty, had been given. Having held, as he did, that the plaintiff asked, before any discussion as to the price of the house, whether it was dry and free from damp, and that she received an affirmative answer and acted upon it, I find it difficult to understand a decision that no warranty was given except upon the assumption that he was persuaded by the arguments on behalf of the defendant to hold that there can be no warranty unless the word “warrant” or some equivalent expression is used.
Whether the parties understood an affirmation made at the time of a sale to be a warranty, that is a contract connected with, but collateral to, the contract of sale itself, must depend not only upon the actual words used but upon the context, and all the surrounding circumstances. In my opinion an affirmation, in circumstances such as those deposed to in the present case, that the house was dry and free from damp, might well amount to a warranty, breach of which would give rise to a claim for damages, although the statement was made with an honest belief in its truth, but I base my decision in the plaintiff’s favour upon the ground of fraudulent misrepresentation, and not upon any alleged breach of warranty.
The next contention was that the decision of the House of Lords in Hedley Byrne & Co. Ltd. v. Heller (2) had established that a person who relies on an innocent misrepresentation and suffers loss as a result is entitled to damages. The speeches in that case establish that, in some cases, a negligent misrepresentation made to anyone who, to the knowledge of the speaker or writer will rely on it and will be damaged if it is incorrect, gives a right to damages: they do not establish that every innocent misrepresentation gives such a right. I shall be dealing with this decision in a later part of this judgment in connexion with the claim for negligence against the auctioneers.
Patrick J. Doyle v Edgar W. Youell
High Court.
11 March 1937
[1938] 72 I.L.T.R 253
Hanna J.
Hanna, J.
The first question I have to decide is: Did the defendant make the statement to the plaintiff before the 12th January that the premises would be in fact subject to 20 years’ remission of rates? The evidence as to this is conflicting. Taking all the evidence into consideration, the conversations, the entry in the solicitor’s attendance docket, and the fact that shortly after the first demand for rates the matter was taken up by the plaintiff, I hold there was during these interviews at the beginning of January, 1932, a representation amounting to a warranty in law made by the defendant that the premises would be subject to a partial remission of rates for 20 years. The next question is: Did the defendant make this statement innocently or recklessly or not caring whether it was true or false? The defendant said he knew that remission of rates would not apply unless he got a grant in respect of this house. Although he received this letter before me, informing him that he could not get a grant, he never gave that information to the plaintiff. The plaintiff never saw this letter. On all the evidence, I hold the defendant made the representation recklessly, not caring whether it was true or false. I cannot say there was actual fraud. I have also to decide whether or not the plaintiff relied on the representation. No doubt he did rely on the representation. I have the fact that he mentioned it to his family—when he said he and his wife had gone into the figures as to remission. I am satisfied the plaintiff relied on the representation. A real difficulty arises here. The plaintiff did get a partial remission of rates for five years, but only for that period. The difference between what he paid and what he would have paid under the 20-year system is easily ascertainable and has been ascertained as £27 10s. 0d., but the difficulty is that I have been asked on behalf of the plaintiff to say that in the next 14 years the plaintiff will have to pay £174 11s. 9d. more in rates than he would have to pay if he was entitled to partial remission for 20 years. But that sum is and could only be an estimate based on a suppositious rate being struck. I do not think it would be right to do that, and therefore I cannot accede to the request made on behalf of the plaintiff. I will, however, declare that the plaintiff is entitled to be indemnified by the defendant in respect of monies paid by the plaintiff for rates each year in excess of the amount the plaintiff would have paid if the premises were subject to a partial remission of rates for 20 years. This indemnity is to come into force in the 6th year and to continue up to and including the 19th year.
The next topic I have to deal with in this case is whether the house is habitable or not. I am satisfied that the rooms on the top floor, with the exception of the small front room, are not habitable. This is demonstrated by the fact that the plaintiff had to take his children out of these rooms. I am concerned next with what is the cause of the dampness. I am satisfied it is due to rain being driven through the porous bricks which were used *254 in the construction of the wall in that portion of the house. This type of brick may be satisfactory for yard walls, etc., but is not satisfactory for flank walls of a house. I hold that the defendant is responsible for the damp state of the house. I hold that at the time of the contract of sale of this then uncompleted house there was an implied warranty that the house when completed would be fit for habitation. Whatever the cause of it was—there was delay on the plaintiff’s part in seeking to get the defendant to do something about the dampness in the house. The defect might have been cured at less expense had the matter been taken up earlier by the plaintiff. A proposition has been put before me on behalf of the plaintiff for the taking down of the wall in question and rebuilding it. I am not prepared to consider that proposition, and am satisfied that the defect can be remedied in the manner put forward by the defence. I will allow £80 for the expense of this work.
The plaintiff to have his costs on the High Court scale.