Misrepresentation and loss of remedies
SALT v STRATSTONE SPECIALIST (CA) [2015]
The Court of Appeal (CA) has clarified that a Court can only award compensation for an ‘innocent misrepresentation’ (under the Misrepresentation Act 1967 (MA)) as an alternative remedy to having the contract set aside where the right to have the contract set aside has not been lost.
Background:
A misrepresentation is a false statement made by one party to another which encourages the other party to enter into a contract and upon which they relied and which caused them to suffer loss.
Types
Where a person makes a false statement that could be treated as a misrepresentation, it could be one of three types:
- Fraudulent - where the person made it knowingly, without belief in its truth or recklessly as to whether it is true or false.
- Negligent - where the person had no reasonable grounds for believing it to be true.
- Innocent - where the person honestly believed it to be true.
Remedies
The remedies available depend upon which type of misrepresentation is in issue.
As a remedy for all types of misrepresentation, the Court has a discretion to set aside or make the contract void (referred to as the remedy of ‘rescission of the contract’ or as having the ‘right to rescind the contract’). The aim of rescission is to put the parties back in their original position, as though the contract had never been entered into in the first place. In relation to a sale of goods, this would mean the buyer returning the goods and receiving a refund of the price paid. This is quite different from the basis upon which damages are awarded for breach of contract, which is to put the injured party in the position it would have been in had the contract been performed in accordance with its terms.
For fraudulent misrepresentations, a Court can award rescission and compensation for the loss suffered (damages) (under section 2(1) MA).
Where a claim relates to a negligent or innocent misrepresentation, the Court has discretion to order rescission or to award damages in lieu of rescission (ie instead), provided the right to rescind has not been lost (under section 2(2) MA).
Facts:
- Stratstone, a car dealer (Car Dealer), offered to sell to Mr Salt (S) a ‘brand new’ sports car which was orally represented by a sales person as being ‘brand new’. He subsequently bought the car for around £22,000.
- The car had numerous problems and after about a year, S tried to reject the vehicle and asked for his money back. The Car Dealer refused to do this so S started legal proceedings against the Car Dealer complaining that the car was not of merchantable quality and seeking compensation.
- During the first hearing of the dispute by the County Court (CC), it was revealed that the car was in fact two years old and had had various repairs as well as having been involved in a collision; it was consequently not ‘brand new’ when S had bought it. He was found to have relied on the Car Dealer’s statement about the condition of the vehicle and would not have bought it if he had been aware of its age and history.
- So S amended his claim to one for misrepresentation and requested that the contract be set aside. This would entitle S to return the car and recover the full price he had paid for it.
CC Decision:
- The CC decided that although there had been a misrepresentation, it could not order that the contract be rescinded as it was not possible to put the parties back in their original pre-contractual position, mainly because:
- the car had since been registered and could not be returned as an unregistered car; and
- there had been a considerable lapse of time since the sale.
- It said that as rescission was therefore not possible, it would exercise its discretion under section 2(2) MA and awarded £3,250 in damages to S instead.
- S appealed to the High Court (HC).
HC Decision:
- The HC reversed the CC’s decision, concluding that it was possible to restore the parties to their original position as:
- the car still existed;
- the fact of registration could not prevent rescission;
- any difference in the car's value should be at the risk of the Car Dealer not S; and
- any delay was not so long that it would prevent rescission as S had only found out about the misrepresentation after he had started the initial proceedings.
- As a result, the HC granted rescission and ordered the repayment of the purchase price to S in exchange for the return of the car.
- The Car Dealer then appealed to the CA.
CA Decision:
- The CA agreed with the HC’s decision. It said that rescission should only be dismissed as a remedy if it really was not possible for the parties to be put back into the position they were in before they entered into the contract and agreed with the HC’s reasoning that this was not the case here.
- It went on to say that if the right to rescission had been lost, it would be difficult to say S would “be entitled to rescind the contract”. On that basis damages would also not have been available to S and the CC should not have exercised its discretion under section 2(2) MA to award damages.
Points to note:
- The CA made it clear that the Court’s discretion to award compensation instead of rescission under section 2(2) MA only applies where the innocent party still has the right to rescind the contract. The so-called ‘bars’ to rescission (ie where that right no longer exists) are where:
- the innocent party has confirmed or implied that it wishes the contract to continue and the contract has therefore been ‘affirmed’;
- a third party has acquired rights to the goods in question, for example if the car was sold to someone else;
- an excessive time has elapsed since the goods were delivered or received such that the buyer would be deemed to have accepted them; or
- the parties cannot be restored to their original position.
- If one of these ‘bars’ exists, such that it would be unfair or inequitable in all the circumstances to grant rescission, the right to rescind is no longer available. In this situation, damages cannot then be said to be awarded ‘in lieu of rescission’. If this happens, the ability to recover damages for a negligent or innocent misrepresentation under section 2(2) MA is also lost. Therefore, the key message coming out of this case is that contracting parties should be extremely careful to ensure that they do not act in a way which would bar the right to rescission where that might otherwise apply.
- There was no mention in the judgment of an Entire Agreement clause which would normally attempt to exclude liability for pre-contractual misrepresentations. If such a provision had existed, the Car Dealer may have been able to rely on it (albeit subject to the reasonableness test under the Unfair Contract Terms Act 1977). Such clauses should always expressly exclude liability for negligent pre-contractual misrepresentations and should also contain a so called ‘declaration of non-reliance’ if they are to have the best chance of being successful. Note that it is not possible to exclude or limit liability for fraudulent misrepresentations.
- Misrepresentations can be written or oral statements and can also be implied by words or by conduct. This case is a pertinent reminder to suppliers to be careful to ensure that their sales personnel do not deliberately, recklessly or inadvertently make pre-contract claims that the company cannot back up.