Law Sessions With Jennifer Housen’s Podcast

When Contracts Go Wrong: Understanding Your Legal Options After Misrepresentation

Subscriber Episode • • Jennifer Housen • Season 5 • Episode 3

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Contract law provides different remedies for misrepresentation depending on whether it's innocent, negligent, or fraudulent, with potential outcomes including rescission and damages calculated on different bases.

• Rescission available for all types of misrepresentation, putting parties back to pre-contractual positions
• Fraudulent misrepresentation allows damages in the tort of deceit covering all losses flowing from misrep
• Negligent misrep remedies available under Section 2(1) of the Misrep Act 1967 with burden of proof on defendant
• Damages assessed on tortious rather than contractual principles as confirmed in Doyle v Olbey and Royscot Trust cases
• Innocent misrep remedies limited to rescission or damages in lieu under Section 2(2) of the Misrep Act 1967
• Right to rescind lost where third parties acquire rights, representative affirms contract, through lapse of time, or restitution impossible
• Car & Universal Finance v Caldwell shows taking all possible steps to rescind can preserve rights
• Long v Lloyd demonstrates affirmation through accepting partial compensation
• In innocent misrep cases, time limits for rescission run from contract formation not discovery (Leaf v International Galleries)

We'll conclude our discussion of misrepresentation in the final session of this law series.


💡⚖️ Let’s learn the law together—one session at a time!

Speaker 1:

Welcome back to this third segment of Contract Law Misrepresentation. Now, in the previous segment I told you that when we returned we would be discussing remedies. Well, in the context of misrepresentation and whether there has been a breach based on misrep. Well, remedies are available for misrepresentation but they are dependent on the type of misrepresentation that it is, be it innocent or fraudulent, or whether it is misrep under the Act negligently. For all types of remedies, for all the types of misrep, you can get the remedy of rescission, because it is available Now. Rescission puts the parties back to their pre-contractual position. Each party gives back the benefit which they have received under the contract. However, that is not always possible to rescind the contract and in some circumstances the right to rescind may be lost, not least because the property may have been sold on.

Speaker 1:

Now damages are available in certain circumstances. You can get damages for fraudulent misrepresentation in what is called the tort of deceit. Now damages for fraudulent misrep basically says that you can get everything flowing from the misrepresentation Case. Of course is Derry and Peake itself. Now damages for negligent misrep in the tort of negligent statements or negligent misstatements under Headley Byrne and Heller. You can get on that basis as well. So you can get at common law equally under section 2.1 of the Misrep Act 1967. Now this is normally the most advantageous basis on which to sue for negligent misrep, as the plaintiff need only prove that the statements are untrue. It is up to the defendant to prove, if he can, that he had good grounds for making the statement. And if you go back to Howard, marine and Dredgen that I raised in the last segment, now damages are assessed on a reliance basis similar as in tort. Now, damages are assessed on a reliance basis similar as in tort.

Speaker 1:

Now the rules on remoteness of damage which apply to the tort of deceit also apply here. Now the point of course, is and you will see this later on when we look at damages in a later law session but when you look at how damages are calculated, there is a different basis in relation to the remoteness of damage in contract as opposed to the remoteness of damage in tort. Now, the remoteness of damage in contract generally looks to what was in the reasonable expectation of the parties. So it looks objectively at what the parties are thinking about when they make the agreement, whereas tort looks at what is reasonably foreseeable, which of course, is a lot wider. So the rules and remoteness of damages are that which apply in tort. In tort. So all losses which directly flow from the misrepresentation are covered, even if they are not foreseeable, as between the parties Now remedies for fraudulent misrep.

Speaker 1:

So if you have a fraudulent misrep, the innocent party is entitled to rescind the contract and claim damages. The damages that are awarded are not based, as I say, on so much contractual principles but on tortious principles. And in Doyle and Albee in 1969, the claimant, doyle, purchased a business from Albee as a result of several fraudulent misrepresentations relating to the profitability and the operations of the business. Now the trial judge assessed damages on contractual principles as to what position the claimant would have been in had the statements been true, and awarded him £1,500. However, the claimant had suffered loss to the extent of £5,500 as a result of entering into the contract. Now the claimant appealed on the assessment of damages and the court said that contractual damages are not applicable to misrepresentation since a representation is not a term of a contract. What? Where there has been a fraudulent misrepresentation, damages should be assessed in the tort of deceit. So contractual damages of course go from the standpoint of a term of the contract being breached. Here we're looking at a representation which is a misrepresentation giving rise to tortious liability damages equivalent. What about negligent misrep? Well, there's a common law position from Hedley Byrne, but the one that is far more advantageous, of course. Section 2.1 of the Misrep Act 1967, says that the same remedies are available where the statement was made negligently as if it was made fraudulently. So again you can get it everything flowing from the breach. Roy Scott and Rogerson confirmed that the principle in fraudulent misrep relating to tortious damages applies also in negligent misrep.

Speaker 1:

So in the case of Roy Scott, a 1991 case, the defendant was a car dealer who misstated the particulars of a sale by higher purchase to the finance company, to the claimant finance company. Now the finance company operated a rule whereby they would only advance money if a 20% deposit was paid by the company. Now the defendant stated the price of the car was £8,000 and the deposit paid was £1,600, leaving the loan to be advanced of £6,400. This was the amount the customer needed to borrow, although the price and the deposit values which they stated were actually false. The customer later defaulted on the hire-purchase, which they stated were actually false. The customer later defaulted on the higher purchase agreement and sold on the car. Remember, I said in an early law session that higher purchase in relation to cars are not a secured borrowing.

Speaker 1:

Now the claimant brought an action against the defendant, seeking damages of £3,625, which was really the difference between £6,400 it paid to the defendant minus the sum of £2,774, which was paid by the customer before he defaulted. The defendant argued that there was no loss since the defendant acquired title to the car, which was worth £6,400. Loss since the defendant acquired title to the car, which was worth 6,400. The trial judge accepted neither submission. He said that if the figures on the higher purchase agreement had shown a deposit of 1,200 pounds and a cash price of 6,000, then the finance company would have paid 4,800 to the dealer and would have had no recourse against it, since the deposit would have been correctly shown as $1,200. Because the finance company were induced to pay an extra $1,600, that was the relevant loss suffered by the finance company.

Speaker 1:

Now both parties of course said well, the judge has gone off on his own. So they appealed and it was held that damages on the section to one of the misrepresenting Act should be assessed on the basis of damages available in tort of deceit, not general contractual principles. This applies in the absence of fraud, and the wording of Section 2.1 was clear and not capable of any alternative construction. What about remedies for innocent misrep? Well, under Section 2.2 of the Misrep Act 1967, the remedies for an innocent misrep are rescission or damages in lieu of rescission. The claimant cannot claim both. Damages are assessed on normal contractual principles in this regard.

Speaker 1:

But what one has to consider when you're thinking of rescission is are there any bars? Is there anything that will stop you rescinding the contract? Well, the right to rescind the contract may be lost where a third party acquires rights, where the representative affirms the contract through lapse of time or where restitution is impossible. Now then, what happens if a third party acquires rights? Well, if a third party acquires rights in the goods example where they have been sold on or subject to a charge or mortgage, rescission will not generally be granted, as it will prejudice the third party's rights. If, however, the representative doesn't act to rescind the contract before a sale has taken place, the third party has not acquired any rights. Now case, of course, is card, universal credit and Caldwell.

Speaker 1:

Mr Caldwell sold his Jaguar on the 12th of January to a rogue Norris who had paid £10 cash deposit and left another car as security and gave a check for £965. The following day Mr Caldwell went to cash the check and discovered it was fraudulent and the car left as deposit turned out to be a stolen car. Mr Caldwell reported the incident to the police and used his best endeavours to cooperate with the police to find Norris in order to rescind the contract of sale. He also contacted the Automobile Association to try to locate the car. Norris had acquired a voidable title to the car. As the contract was induced by fraudulent misrepresentation, norris sold the car onto a third party on the 15th of January. The question the court had to answer was whether the actions taken by Mr Caldwell were sufficient to avoid the contract and, of course, get it back from the third party. The court did hold that Mr Caldwell had successfully rescinded the contract because he had taken all steps possible to demonstrate that he no longer wished to be bound by the contract. He should not be prejudiced, they said, by the fact that his endeavors failed to locate Norris. What if you've affirmed the contract? Well, if the representative doesn't act to adopt the contract or demonstrate a willingness to continue with the contract after becoming aware of the misrepresentation, they will lose the right to rescind.

Speaker 1:

Case, of course is Lung and Lloyd, where the claimant purchased a lorry from the defendant. The lorry was advertised in a newspaper which described the lorry as being in exceptional condition. The claimant phoned the defendant to arrange a viewing and was told it was in first class condition. He went to view it the following day and was told it was capable of doing 40 miles an hour and 11 miles to the gallon. The claimant test drove it and found that the speedometer was not working and he had to pull a wire for the accelerator. As this was not working also, the claimant still decided to purchase the lorry.

Speaker 1:

On the first journey the claimant noted certain faults with the lorry and contacted the defendant, who offered to pay half the repairs. The claimant accepted this. However, on a further journey the lorry broke down completely and the claimant wished to rescind the contract and brought an action against the defendant for innocent misrep. The court said that by accepting the offer of payment for half the repairs when he became aware of the defects, the defendant had lost his right to rescind as he had affirmed the contract. And clearly you've gone through so many stages, the court is going to say well, you go, it's not working, you still take it. You've tried. The court said rescission no. That is not to say, of course, that you can't get damages.

Speaker 1:

Lapse of time the right to rescind will be lost after a lapse of time. If the misrep is negligent or fraudulent, time only starts to run from discovery. If it is a wholly innocent misrep, then time runs from entering into the contract. Case, of course, is Leif and International Galleries, where the claimant purchased a painting from the defendant. Both parties believed that the painting was by the artist's constable. In fact, five years later the claimant discovered the painting was not a constable.

Speaker 1:

The claimant brought an action based both on misrep and mistake and the claim based on misrep was successful. However, since it was an innocent misrep, the claimant had lost the right to rescind the contract through lapse of time. With innocent misrep, the time starts to run from the date of the contract, not the date of discovery. The claim based on mistake was unsuccessful as the mistake related to the quality and did not render the subject matter something essentially different from that which it was believed to be. He believed he was buying a painting. The court said and he got a painting. Restitution what if restitution is impossible? Well, where it is impossible to restore the parties to their pre-contractual position example, where the goods have perished or have been consumed the right to rescind will be lost. Those, then, are the remedies. When we come back, we will conclude in the final session of this misrepresentation law session.