Has the law concerning rescission for misrepresentation been made clearer?

Has the law concerning rescission for misrepresentation been made clearer?

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Author: James Modley

Applies to: England and Wales

When a contract has been entered into as a result of a misrepresentation, the predominant question nearly always asked is whether the contract can be rescinded or is the party limited to claiming damages?

This article explores the recent decision by the Court of Appeal in Salt v Stratstone Specialist Limited T/A Stratstone Cadillac Newcastle [2015] EWCA Civ 745.

The Law

If a party enters into a contract and it relied upon a misrepresentation, the remedy varies depending on the type of misrepresentation such as negligent, innocent or fraudulent.

In all three types of misrepresentation, the innocent party can seek rescission, where the parties are restored to the positions they were in before the contract was entered into.

If the misrepresentation was fraudulent or negligent, the innocent party is entitled to seek damages of, or in addition, to rescission. The basis for this can be found in common law, or Section 2 (1) of the Misrepresentation Act 1967 (the 'Act').

If the misrepresentation was negligent or innocent, the court is able to award damages in lieu of rescission under Section 2 (2) of the Act .

The facts

Mr Salt, purchased a Cadillac CTS 3.6 litre Sport Luxury Car (the 'Vehicle') in September 2007. Before Mr Salt purchased the Vehicle, the defendant verbally informed him that it was 'brand new'. In fact, whilst the vehicle had never been registered, it was two years old and had been repaired following a collision.

Following his purchase, Mr Salt discovered that the Vehicle had numerous defects which emerged over a period of time. The defendant repaired some of these, but one year later in September 2008, Mr Salt tried to return the vehicle and obtain a full refund. The defendant refused and Mr Salt proceeded to issue legal proceedings claiming damages.

As a result of disclosure of documentation leading up to trial, Mr Salt discovered that the Vehicle was not new at the time of purchase. He therefore amended his pleadings to include misrepresentation and sought to claim rescission.

The original decision

The Court found that Mr Salt had relied upon the misrepresentation at the time of the purchase and believed he would not have purchased the Vehicle if he was aware of its true history. However, the District Judge held that he could not order rescission of the contract, because he believed he could not put the parties back in their original position. Consequently, the District Judge ordered damages in the sum of £3,250, this being the value of the Vehicle if it was new and its actual value at the time of purchase, plus a minimal sum for inconvenience.

The first appeal

Mr Salt appealed this decision. Upon hearing the appeal, the Circuit Judge reversed the initial decision and found that rescission was possible and ordered the same.

The Court of Appeal Decision

The defendant appealed the decision to the Court of Appeal.

The main reasons for the appeal were:

  1. The Circuit Judge exercised a discretion under Section 2 (2) of the Act which he should not have;
  2. Putting the parties into the positions they were in before the contract was entered into was impossible;
  3. Damages in the sum of £3,250 was an adequate remedy; and
  4. The delay of nearly 4 years between the sale of the Vehicle and seeking rescission was a bar to relief as it had been in Leaf v International Galleries [1950] 2 KB 86 ("Leaf")

The Court of Appeal dismissed the defendant's appeal and ordered rescission. It found that restitution was not impossible. It said that it this option should be available if 'practical justice' could be done. This 'practical justice' might require a defendant to be compensated for depreciation or for the lack of use or enjoyment of the vehicle, however this is for the defendant to prove.

As a consequence of the above, the Court of Appeal found that it was not impossible to put the parties back into the position before the contract was entered into and that the damages which were awarded, were not sufficient.

The Court of Appeal also found that the delay of time was not, on its own, a bar to rescission. Whilst the Court of Appeal examined Leaf, whereby it was found rescission was not available on the basis that a defendant in a misrepresentation claim should not be in a worse position than someone who had made the misrepresentation a term of the contract, it found that this did not apply. This was on the basis that in Leaf, the point did not arise in pleadings as to whether the claimant was entitled to reject the car. Further, it was acknowledged that Leaf was decided before the Act was introduced. As Section 1 of the Act provides that rescission is available even if misrepresentation has become a term of the contract, the Court stated that it is doubtful whether Leaf is still good law.

Conclusion

It is clear by the courts approach in Salt that the court will now look at whether 'practical justice' can be done. Whilst each case will turn on its own merits, it appears that the court will take a flexible approach and, where possible, try to ensure a fair result is achieved which is in the interests of justice.

If you have any questions or believe that your business has entered into a contract where a misrepresentation has occurred, James Modley and the Dispute Resolution and Compliance team are here to help.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the Author

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James Modley

Solicitor

03700 86 4162

James is a solicitor within our dispute resolution and compliance team. James specialises in commercial disputes and is based in our Birmingham office. James works closely with clients to avoid, resolve and if necessary litigate disputes. James provides advice on a variety of commercial disputes including breach of contract, shareholder and company disputes, claims of misrepresentation, fraud, professional negligence, injunctive relief, debt recovery and general commercial litigation matters.

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