Legal Briefing

The Court of Appeal clarifies the law on remedies for misrepresentation

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Corporate and commercial | 13 November 2015

The remedies available for misrepresentation depend on whether the misrepresentation was fraudulent, negligent or innocent. If a misrepresentation is fraudulent or negligent, the claimant may claim both rescission and damages under s2(1) of the Misrepresentation Act 1967 (the Act). If a misrepresentation is negligent or innocent, the court has the discretion to award rescission or damages in lieu of rescission under s2(2) of the Act. In the recent case of Geoffrey Alan Salt v Stratstone Specialist Ltd [2015] the Court of Appeal confirmed that the courts have no discretion to award damages for innocent or negligent misrepresentation under s2(2) where the remedy of rescission is not in fact available.


The judgment also revisited the law on delay as a bar to the equitable remedy of rescission and suggests that the often cited case on delay, Leaf v International Galleries [1950], is no longer good law.

FACTS

In 2007, Stratstone Specialist Ltd (Stratstone) offered to sell sports car enthusiast Mr Salt a Cadillac described as ‘brand new’. Mr Salt agreed to buy the car for £21,895. However, the vehicle was not brand new. Although the car had never had a registered owner, it had been manufactured and delivered to Stratstone in 2005. It had had various repairs in the course of 2005 and 2006 and been involved in a serious collision.

Numerous defects with the car came to 
Mr Salt’s attention after the sale. Stratstone repaired some of the defects but, in September 2008, Mr Salt sought to return the vehicle and asked for his money back. Stratstone refused to reimburse Mr Salt, who then issued a claim for damages on the basis that the car was not of merchantable quality.

During the course of proceedings, documents were disclosed by Stratstone which revealed that the car was not new and Mr Salt amended his claim to include misrepresentation and a claim for rescission.

JUDGMENT AT FIRST INSTANCE

District Judge Hickman held that Mr Salt would not have bought the car without Stratstone’s misrepresentation that it was brand new. He found that damages were the more appropriate remedy in this case. He decided that it would not be possible to order the rescission of the contract because restoration to the original, pre-contractual position was impossible since (i) the car was now registered and could not be returned as an unregistered car and (ii) there had been a considerable lapse of time since the sale and he could not adjust the amount of the price that would be repayable to allow for the vehicle’s depreciation. Hickman DJ therefore held that Mr Salt was confined to a remedy in damages, which he assessed as the £3,000 difference between the car’s value if it had been new at the time of sale (£22,000.00) and its actual value (£19,000), plus £250 for the inconvenience caused by the need to repair the vehicle’s defects. Mr Salt appealed.

APPEAL

On appeal Judge Harris QC reversed the decision of the District Judge. He found that it was possible to restore the parties to their pre-contractual position because: (i) the vehicle still existed; (ii) the fact of registration could not be a bar to rescission; (iii) any difference in the car’s value should be at the risk of the misrepresentor and not the misrepresentee; and (iv) any delay was not so long as to operate as a bar to rescission. For these reasons Harris J ordered rescission and awarded Mr Salt his costs on an indemnity basis. Stratstone appealed.

COURT OF APPEAL

Stratstone appealed on the basis that: (i) Hickman DJ had exercised a discretion under s2(2) of the Act, with which Harris J should not have interfered; (ii) restoration to the original pre-contractual position was impossible; (iii) damages were an adequate remedy; and (iv) delay of nearly four years between the formation of the contract and the seeking of rescission was a bar to relief as it had been in Leaf v International Galleries [1950]. The Court examined each of these grounds for appeal in turn.

Damages under s2(2) of the Act are not available if there is a bar to rescission

Lord Justice Longmore noted that Hickman DJ had not said in terms that he was exercising his discretion to award damages under s2(2) of the Act, but that he seemed to have thought the choice was open to him to award rescission or damages (and that damages were not dependent on the availability of rescission). Longmore LJ, giving the leading judgment, reviewed the conflicting case law as to whether or not, if rescission is not available as a remedy, damages may be awarded. In Alton House Garages (Bromley) Ltd v Monk (1981) and Atlantis Lines and Navigation Co Inc v Hallam Ltd [1983], it was held that if rescission was barred, damages were not available; but in the more recent decision of Thomas Witter Ltd v TTBP Industries Ltd [1996] it was held that the unavailability of rescission would not prevent damages.

Noting that these contradictory precedents were all first instance decisions and the issue remained open for decision by the Court of Appeal, Longmore LJ considered the wording of s2(2) of the Act:

‘If it is claimed… that the contract ought to be or has been rescinded… the court… may declare the contract subsisting and award damages in lieu of rescission’.

He held that these words carried with them the implication that, for damages to be awarded, the remedy of rescission was available. Therefore, if rescission was not available because the contract had been affirmed, third-party rights had intervened, an excessive time had elapsed or restitution had become impossible, damages could not then be said to be awarded ‘in lieu of rescission’.

Restitution was not impossible

Longmore LJ deemed that rescission was the ‘normal remedy’ for misrepresentation and was prima facie available if what was ‘practically just’ could be done. If such practical justice required the misrepresentor to be compensated for depreciation, or that the vehicle’s use be taken into account, that was for the misrepresentor to assert and prove. Longmore LJ found that a vehicle’s registration status (a legal concept) could not be said to change the physical entity of the car and make restitution impossible.

Damages were an insufficient remedy

As rescission should still be the normal remedy for misrepresentation, unless restitution was truly impossible, Longmore LJ held that Mr Salt should be able to recover the £21,895 he paid for the car 
and that damages of £3,250 were insufficient compensation for the wrong 
he had suffered.

Delay was not a bar to rescission

Longmore LJ noted that Leaf v International Galleries, in which delay by the claimant had prevented rescission, had been decided before the Act had been passed. In Leaf, the claimant bought a painting of Salisbury Cathedral innocently misrepresented to be by ‘J Constable’ in 1944. In 1949 the claimant discovered the painting was not by the John Constable and sought to rescind the contract. The court did not permit rescission despite the fact that the claimant had acted promptly on the discovery that the painting was not by Constable.

Longmore LJ held that lapse of time on its own could not be a bar to rescission. Mr Salt had only been aware of the availability of rescission after disclosure had taken place in the first instance proceedings when he discovered the car was not in fact new. It would be unfair for Stratstone to be able 
to rely on the suggestion that, because it was too late to reject the car, it was likewise too late to rescind the contract. 
Mr Justice Roth, in his consenting judgment, emphasised that rescission on the basis of misrepresentation was an equitable remedy and that, in the absence of a statutory bar, an objection to rescission must rest on an equitable basis. It was therefore contradictory to say that rescission may be barred by lapse of time. It was only the lapse of time such that it would be inequitable in all the circumstances to grant rescission which could constitute a bar to the remedy.

COMMENT

While the judgment limits the potential to claim for innocent misrepresentation to those cases where rescission is an available remedy, it still demonstrates that the courts will seek to do practical justice: neither delay nor minor impediments should prevent courts from ordering the rescission of a contract.

Nevertheless, on discovery of a negligent or innocent misrepresentation, potential claimants should ensure that they do not create any bars to rescission through affirmation of the contract, undue delay in bringing the claim or allowing a bona fide third party to acquire rights under the contract that would be prejudiced by rescission.

Defendants seeking to prevent a claim for rescission due to a claimant’s delay in bringing the claim must establish that granting rescission after the delay would lead to an inequitable outcome.

By Chimé Metok Dorjee, associate, 
Cooley (UK) LLP.