Ebook Law of contract (10th edition) Part 1

(BQ) Part 1 book Law of contract has contents The evolution and definition of the modern contract, the fact of agreement, consideration, intention to create legal relations, capacity, the terms of the contract, exemption clauses, misrepresentation,...and other contents

premium Your complete learning package N A POWERED BY R C AS E V I G AT O Use the eText to link to Case Navigator, for help and practice with case reading and analysis in contract law In addition, access all of the self study resources for your complete learning package ■ Interactive multiple choice questions ■ Practice exam questions with guidance ■ Annotated weblinks ■ Glossary ■ Glossary flashcards ■ Animated diagrams with audio commentary ■ Legal newsfeed ■ Legal updates Turn over to find the access card that allows you to activate mylawchamber premium Case Navigator access is included with your mylawchamber premium registration The LexisNexis element of Case Navigator is only available to those who currently subscribe to LexisNexis Butterworths online Tenth Edition Law of Contract Paul Richards Law of Contract, part of the Foundations series, offers a comprehensive, clear and straightforward account of the law ideal for LLB or GDL/CPE students Written with the student reader in mind, each text is rich in learning features designed to illuminate complex legal principles and promote solid understanding and confidence in legal study Readers will gain a firm grasp of the essential concepts as well as an awareness of important recent developments in the law Each text in the series offers a wealth of study support features: • Chapter aims and objectives outline from the start what you will learn in each chapter • Case summaries highlight the central themes of key cases in the subject, clearly set apart from the surrounding text • Chapter summaries draw together the main concepts covered in each chapter, cementing understanding • Further reading lists at the end of each chapter direct students to subject-specific resources to enrich understanding • Marginal cross-references help the reader make connections within the text and aid understanding of how the material fits together • Glossary of important legal terms provides a handy reference tool • Easy-to-read presentation promotes comprehension premium Tenth Edition Law of Contract All our premium sites provide access to an interactive Pearson eText, an electronic version of Law of Contract which is fully searchable You can personalise your Pearson eText with your own notes and bookmarks, and extensive links are provided to the resources below The eText page presentation mirrors that of your textbook foundations series foundations series www.downloadslide.com Tenth Edition Law of Contract Paul Richards premium ABOUT THE AUTHOR foundations series Richards PAUL RICHARDS is Head of the Department of Law at the University of Huddersfield He has had many years of experience as a lecturer in contract law, land law and trusts, and serves as an examiner and moderator for various examining bodies www.pearson-books.com Cover © Getty Images CVR_RICH3618_10_SE_CVR.indd 28/02/2011 14:04 www.downloadslide.com Law of Contract www.downloadslide.com foundations series Written with learning in mind, these texts allow students to gain a solid understanding of the law Each book presents the subject clearly and accessibly for effective and satisfying study The Foundations series comes with mylawchamber premium which provides online study support through: the interactive Pearson eText, Case Navigator, practice questions, online glossary and legal updates, all located at www.mylawchamber.co.uk Available from all good bookshops or order online at: www.pearsoned.co.uk/law premium www.downloadslide.com Tenth edition Law of Contract PAUL RICHARDS Head of the School of Law, University of Huddersfield www.downloadslide.com Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1992 Tenth edition published 2011 © Longman Group UK Limited 1992 © Pearson Professional Limited 1995 © Financial Times Professional Limited 1997 © Pearson Education Limited 1999, 2002, 2004, 2006, 2007, 2009, 2011 The right of Paul Richards to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS Crown Copyright material is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland Law Commission Reports are reproduced under the terms of the Click-Use Licence Pearson Education is not responsible for the content of third party internet sites ISBN: 978-1-4082-5361-8 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Richards, Paul, 1951– Law of contract / Paul Richards – 10th ed p cm ISBN 978-1-4082-5361-8 (pbk.) Contracts – England Contracts – Wales I Title KD1554.R53 2011 346.4202–dc22 2010053166 10 14 13 12 11 Typeset in 9/12 pt Stone Serif by 35 Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire www.downloadslide.com To Maggie with all my love for now and the future and to my brother Anthony Richards MBE for being there www.downloadslide.com www.downloadslide.com Brief contents Preface Guided tour Table of cases Table of statutes Part The formation of a contract The evolution and definition of the modern contract The fact of agreement Consideration Intention to create legal relations Capacity Formalities Part The contents of the contract The terms of the contract Exemption clauses xv xviii xx xxxvi 13 60 90 97 112 125 127 165 Part Factors that vitiate a contract 229 10 11 12 231 Misrepresentation Mistake Duress, undue influence and inequality of bargaining power Illegality 257 299 331 Part Discharge of contracts 369 13 Discharge by performance and breach 14 Discharge by agreement 15 Discharge by frustration 371 Part Remedies for breach of contract 417 16 The common law remedy of damages 17 Equitable remedies and limitation of actions 18 Quasi-contract and the law of restitution 419 394 399 466 477 vii www.downloadslide.com BRIEF CONTENTS viii Part The rights and liabilities of third parties to the contract 491 19 Privity of contract 20 Agency 21 Assignment of contractual rights 493 Glossary Index 569 576 528 556 www.downloadslide.com Contents Preface Guided tour Table of cases Table of statutes xv xviii xx xxxvi Part The formation of a contract The evolution and definition of the modern contract Aims and objectives Evolution Definition Summary Further reading 3 11 12 The fact of agreement 13 Aims and objectives Introduction Offer Acceptance The fact of acceptance The termination of offers Certainty of terms 13 13 16 26 28 44 51 Summary Further reading 55 58 Consideration 60 Aims and objectives Introduction The definition of consideration Consideration may be executed or executory but not past Consideration must move from the promisee though not necessarily to the promisor Consideration must be sufficient though not necessarily adequate 60 60 61 62 Summary Further reading 87 89 66 67 ix www.downloadslide.com CHAPTER MISREPRESENTATION 242 www.downloadslide.com THE REMEDIES AVAILABLE FOR MISREPRESENTATION The remedies available for misrepresentation Rescission and indemnity Rescission The general rule is that the effect of misrepresentation is to render the contract voidable, not void, and thus the contract is still valid and subsisting until the representee decides to set it aside Of course, the representee may decide to carry on with the contract, that is, to affirm it A representee may affirm the contract either by expressing the intention to so or by simply performing such an act as would indicate to a reasonable person that the representee intends to proceed with the contract A further remedy available to the representee is to cease the performance of the contract and allow themself to become liable for breach of contract, then raising the misrepresentation as a defence to the action for breach This occurs commonly where a person fails to declare matters of importance when filling in a proposal form to an insurance company As we have already seen (above), such contracts are contracts uberrimae fidei and therefore a person is bound to declare matters of interest to a prudent insurer The insurer on finding out about the omission may rescind the contract Very often insurers will refuse to return any premiums paid, but if sued for their return may successfully raise the misrepresentation as a defence to the action Misrepresentation thus acts as a bar to an order for a decree of specific performance of the contract As an alternative to the above approaches the representee may decide to rescind the contract which they may simply by making clear to the other party that they no longer consider themself bound by the contract Once the representee has elected to treat the contract as either rescinded or affirmed then they cannot retract from that election If they delay in making the election they will be deemed to have affirmed since, as we shall see later, delay defeats equity and since rescission is an equitable remedy the representee will be precluded from claiming While the communication to the representor of the representee’s election to rescind the contract is crucial, this communication is relaxed in two instances First, it may be that the representor cannot be contacted so that communication of the election is impossible, as where a person making a fraudulent misrepresentation to acquire goods makes off with them and disappears In such circumstances all that the representee is required to to effect rescission is to show by some overt act that they intend to rescind Car and Universal Finance Co Ltd v Caldwell [1964] All ER 290 A car was sold and delivered to a rogue whose cheque was dishonoured the next day, by which time the rogue and the car had disappeared In order to attempt to recover the car the owner informed the police and the Automobile Association The rogue then sold the car to a garage which knew that the rogue had a defective title to the vehicle The garage subsequently sold the car to a buyer who purchased the car in good faith It was held that the owner, by informing the police and the Automobile Association, had made it clear that he sought to rescind the contract, with the result that the rogue no longer had title to the goods so that no title could pass to the garage or to the innocent buyer, and the latter had to return the car to the owner 243 www.downloadslide.com CHAPTER MISREPRESENTATION Second, if the representee seizes or otherwise retakes possession of the goods from the representor, this action of itself amounts to rescission and there is no requirement for the representee to communicate the election to rescind formally So far we have been considering the exercise of rescission out of court but it is possible, and indeed desirable in some cases, to apply to the court for a formal order of rescission Such a situation might arise where a representee has been induced to buy shares by way of a misrepresentation Since the representee has paid money to the representor it is useless to think in terms of repossessing the moneys paid, and while it may be possible to declare one’s intention to rescind to the other party this is unlikely to have any great effect In the sale of goods, the reason for informing the rogue of one’s election or informing the police etc is often to prevent title being passed to some third party, but this is not the case with money Whatever one’s motives for applying for a formal order, it should be noted that even here rescission is regarded as an act of the representee, and the result is that the rescission takes effect from the date of the communication of the application of the order to the representor rather than from the award of the order by the court The effect of rescission for misrepresentation is to render the contract void ab initio, which requires that the parties should be restored to their original positions It follows that if this so-called restitutio in integrum cannot be achieved then rescission is not possible There must be an ability to give counter-restitution as well since it must always be borne in mind that the logic of rescission is to place the parties back in the same position they would have been in had there been no contract See here the judgment of Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) App Cas 1218 A problem might arise, however, in that while the parties can be substantially returned to their status quo ante, the representee might have incurred other expenses which would not necessarily figure in the mutual handing back of what each party has received under the contract In fraudulent misrepresentation this presented no problem since damages were available at common law for this type of misrepresentation and the expense element was often included within the damages element In innocent misrepresentation, however, damages were not available at common law and thus the courts, to make an award for such expenses incurred, had to manipulate the rules so as to produce a substantial return of the parties to their status quo ante The courts achieved this by making an award, not of damages, but of an indemnity, whereby the representee was awarded a sum that equated with expenses or obligations necessarily incurred as a result of the representation One final point that should be noted with regard to rescission is that it is available for any type of misrepresentation Indemnity As already stated, an indemnity is a means whereby, as part of the process of restitutio in integrum, the representee can recover expenses necessarily incurred by the creation of the contract induced as a result of the misrepresentation It is important that an indemnity is not confused with a person’s common law right to damages The distinction may be seen in the case of Whittington v Seale-Hayne 244 www.downloadslide.com THE REMEDIES AVAILABLE FOR MISREPRESENTATION Whittington v Seale-Hayne (1900) 82 LT 49 In this case the plaintiffs were lessees of premises which they used for breeding poultry They alleged that they were induced to take up the lease because of representations made by the defendant’s agents that the premises were in a sanitary condition and in a good state of repair They further alleged that as a consequence of the premises being in an insanitary condition their farm manager and his family became seriously ill and that much of the poultry either died or became valueless for breeding purposes The local authority also condemned the premises as being unfit for human habitation because of defective draining The plaintiffs claimed that they were entitled to an indemnity as regards the losses in respect of the stock and the medical expenses of the farm manager and his family since these were incurred as a consequence of entering into the contract It was held that the claim would fail as it really amounted to a claim for damages, which could not be awarded for an innocent misrepresentation The plaintiffs were, however, entitled to those expenses which were incurred as a requirement of entering into the lease, such as rent, rates and repairs The contract did not require the plaintiffs to appoint a manager so the expenses claimed in respect of his medical condition were not an expense necessarily incurred by the contract Similarly the contract did not require the farm to be used as a poultry farm and therefore these expenses also were not necessarily incurred by the contract Bars to the remedy of rescission A person may be barred from exercising the remedy of rescission in four circumstances Affirmation We have already seen that when a person elects to affirm the contract that election cannot be retracted and rescission will cease to be available to the representee It should, however, be remembered that the election may be made expressly or made impliedly by conduct and that, further, affirmation can only take place if the representee knows of the truth of the situation As regards the latter mere rumours or vague hints as to the untruth of the representations made are not regarded as discovery of the truth An example of affirmation can be seen in the following case Long v Lloyd [1958] WLR 753 The vendor of a lorry falsely stated that it was in good condition and the vehicle was subsequently purchased by the plaintiff After the first journey some defects were found, but when they were pointed out to the defendant he offered to meet half the costs of the repairs and this offer was accepted by the plaintiff The following day on the second journey the lorry broke down and serious defects were discovered to the extent that it was unroadworthy The defendant’s representations as regards the vehicle were clearly untrue, though honestly made, and the plaintiff sought to rescind the contract for innocent misrepresentation It was held that by accepting the offer of assistance with the repairs after the first journey the plaintiff had accepted the lorry and therefore lost any rights he may have had to rescind the contract Lapse of time Rescission is not barred by lapse of time where the misrepresentation is fraudulent; it simply provides evidence of affirmation of the contract In this type of misrepresentation 245 www.downloadslide.com CHAPTER MISREPRESENTATION time only becomes relevant from the discovery of the truth of the misrepresentation Similarly, once the misrepresentation has been discovered, any time spent negotiating a solution to the dispute does not count towards debarring a claim In misrepresentations other than fraudulent misrepresentations the rule is that rescission must take place within a reasonable time, even though there is no evidence of an intention to affirm the contract Leaf v International Galleries [1950] All ER 693 The plaintiff bought a painting after accepting it to be a genuine Constable on the basis of misrepresentation made by the defendants Five years after the sale the plaintiff discovered that the painting was not by Constable and sought to rescind the contract on the grounds of innocent misrepresentation It was held that his right to rescind was barred Even though there was no evidence that the plaintiff had affirmed the contract the lapse of time nevertheless debarred him from his remedy Where restitutio in integrum has become impossible The basis of the remedy of rescission is that of restitution, that is, a mutual handing back of what has been given and received under the contract The principle, then, is that rescission cannot take place if the parties cannot be returned substantially to their original positions Clearly there should be no problem if the representee merely has to hand back money received, but the position may be very different with other types of property or benefits received One example could be if the representee has been induced to purchase a car by the misrepresentation but, prior to the exercise of rescission, they have had an accident and written it off Similarly, the benefit received might have deteriorated in value, as in a sale of shares induced by a misrepresentation where prior to the exercise of rescission the value of the shares had fallen substantially, as in Armstrong v Jackson [1917] KB 822 Still further, rescission would not be possible if the representee had consumed the goods misrepresented to them Of course, there are various degrees by which the property or benefits might have changed At common law the rule relating to rescission was strict in the sense that the restitution had to be precise Equity was not so strict and it allowed rescission if the property or benefit returned was substantially the same as when it was received, minor charges being compensatable by damages in all but innocent misrepresentations The same is also true where the representee has enhanced the value of the item received, since here they may be able to claim the cost of such enhancement as damages, though not (as stated earlier) for innocent misrepresentation The intervention of third parties In a broad sense this bar to the right of rescission is really only an extension of the principles discussed in (3) above Here the right to rescind will be lost if an innocent third party acquires the subject matter of the contract in good faith and for value The situation commonly arises in a case of fraudulent misrepresentation where a person is induced to sell certain items to the representor by fraud If the representor sells the items to an innocent third party then the remedy of rescission will be barred by the acquisition of title to the goods by the third party It can be seen, as in Car and Universal Finance Co Ltd v Caldwell, for instance, that it is extremely important for the representee to exercise the right of rescission as soon as possible after discovering the fraud, since this 246 www.downloadslide.com THE REMEDIES AVAILABLE FOR MISREPRESENTATION will preclude a third party from acquiring the title to the subject matter of the contract and enable the representee to recover the goods from the third party by way of an action in the tort of conversion This area is dealt with more fully in Chapter 10 under unilateral mistake as to identity Damages in lieu of rescission Before we proceed to analyse the remedy of damages in relation to misrepresentation fully it needs to be pointed out that the right of rescission may be lost where the court decides to exercise its discretion under s 2(2) of the Misrepresentation Act 1967 and award damages in lieu of rescission Section 2(2) provides: 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 of the 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 the opinion that it would be equitable to 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 the other party It is important to note that the discretion to award damages in lieu of rescission cannot be exercised in relation to fraudulent misrepresentation The reason for this can be found in the general reasoning for the introduction of the discretion, which is to extinguish the use of rescission in cases where the consequences of the misrepresentation are trivial and where damages would provide an adequate remedy This poses a particular problem in innocent misrepresentation where the only remedy available is rescission and therefore the Act permits the court to award damages in lieu of rescission in an appropriate case Fraud, however, is never regarded as trivial and thus the discretion does not arise in that type of misrepresentation Another important aspect of s 2(2) is that it applies only where a person ‘would be entitled by reason of the misrepresentation to rescind the contract’ The effect of this is that if a person’s entitlement to claim rescission is barred by one of the factors discussed above then the court cannot exercise its discretion in relation to an award of damages under s 2(2) In the case of innocent misrepresentation this may of course result in the representee being without any remedy, with the exception of claiming indemnity Thomas Witter Ltd v TBP Industries Ltd [1996] All ER 573 (ChD) In this case, it was suggested that the power to award damages under s 2(2) does not depend on an existing right to rescission but only on the right having existed in the past There may be some sympathy with such a view in that as a matter of policy there seems to be no reason why the operation of one of the bars to rescission should restrict the discretion to award damages For instance, while it may be inappropriate to allow rescission where the contract has been affirmed or third-party rights have intervened, there seems to be no reason why this should prevent a court from making an award of damages A reading of s 2(2), however, seems to indicate that the reasoning of the court is incorrect Section 2(2) operates only where on the facts the representee ‘would be entitled, by reason of the misrepresentation, to rescind the contract’ On this wording it would appear that the representee must still be able to avail themself of rescission at the time they bring the action This would clearly not be the case if one of the factors that bar a person’s right to rescission exists 247 www.downloadslide.com CHAPTER MISREPRESENTATION Authority for this proposition may be found by analogy in Law Debenture Trust Corporation plc v Ural Caspian Oil Corporation Ltd and Others [1993] All ER 355, where Hoffmann J considered that damages could not be awarded in lieu of injunctive relief by virtue of the Supreme Court Act 1981, s 50, if injunctive relief itself was unavailable This position was followed in Zanzibar v British Aerospace (Lancaster House) Ltd (2000) The Times, 23 March The action arose out of the purchase of a corporate jet from British Aerospace by the Zanzibar government in 1992 The thrust of the action was that Zanzibar had been induced to purchase the jet by virtue of representations made by British Aerospace as to the type of the jet and its airworthiness, which were untrue Zanzibar claimed to be entitled to rescission or, alternatively, damages under s 2(2) of the Misrepresentation Act 1967 It was held that the effect of Zanzibar’s delay in applying for rescission meant that the right had been lost and that the necessary consequence of this was that the right to damages in lieu of rescission had also been lost The court in the Thomas Witter case also addressed the issue of the effects where damages under s 2(1) were not available because the defendant had proved that ‘he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true’, i.e the so-called ‘innocence defence’ If this were the case then presumably the defendant could still be liable for innocent misrepresentation, entitling the plaintiff to apply for rescission, although they could be granted damages in lieu of this remedy under s 2(2) In deciding whether or not to exercise its discretion the court has to take into account the degree of seriousness of the breach and the likely consequences of the exercise of the discretion on the representee and the representor, particularly in cases involving an innocent misrepresentation where the degree of loss is minimal Damages for misrepresentation Fraudulent misrepresentation Damages are available at common law for fraudulent misrepresentation, the measure being a tortious one since the claim is based on the tort of deceit The difference between a tortious measure and a contractual one is that in the latter the principle behind the award is to place the injured party in the same position they would have been in had the contract been completed A tortious measure is based on the principle of placing the injured party in the same position they would have been in had the wrongful act not been committed While the measure of damages in tort is limited by the concept of remoteness of damages, that is, that one is only liable for damages that are reasonably foreseeable, this has no application in fraud where the damages are awarded on a causation basis Lord Denning in Doyle v Olby (Ironmongers) Ltd [1969] QB 158 stated the position to be as follows: The defendant is bound to make reparation for all the actual damage following from the fraudulent inducement It does not lie in the mouth of the fraudulent person to say that they could not have been reasonably foreseen The decision in Doyle v Olby (Ironmongers) Ltd was affirmed in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] All ER 769 Lord Browne-Wilkinson set out the principles to be applied in assessing the damages payable 248 www.downloadslide.com THE REMEDIES AVAILABLE FOR MISREPRESENTATION where a contract has been induced by a fraudulent misrepresentation He stated that: first, a defendant is bound to make reparation for all the damage that directly flowed from the transaction; second, although such damage need not be foreseeable, it must have been directly caused by the transaction, i.e there must be a causative link; third, in assessing the damages credit must be given for any benefits a plaintiff may have received from the transaction and that their entitlement to the full price paid would be reduced by this amount; fourth, as a general rule the benefits received by the plaintiff would include the market value of the goods acquired by them as at the date of acquisition, but this rule would not be applied where it would prevent the plaintiff from receiving full compensation for the wrong suffered; fifth, the circumstances in which the general rule would not apply could not be fully stated – however, it would not apply in two circumstances: (a) where the misrepresentation had continued to operate after the date the asset was acquired, or (b) the circumstances were such that the plaintiff was locked into the property by reason of the fraud; sixth, the plaintiff was entitled to recover consequential losses caused by the transaction; and seventh, the plaintiff had taken all reasonable steps to mitigate their losses once they had discovered the fraud The result is that the court will award damages for all losses including consequential losses It is this factor, the lure of heavier damages, that may encourage representees to pursue a claim under fraudulent misrepresentation This is not an inevitable result In East v Maurer [1991] All ER 733 the Court of Appeal stated that the ‘reparation for all actual damage’ as indicated by Lord Denning would include loss of profits The assessment of loss of profits, however, was to be made on a tortious basis The result is that the assessment of damages for loss of profits caused by a fraudulent misrepresentation must be based on the level of profits that might have been expected had the false representation not been made, rather than on the basis of a contractual warranty The effect of such an approach may well result in the amount of damages to be awarded for loss of profits being reduced, as indeed they were in this case Negligent misrepresentation at common law Clearly the measure of damages here is based on a tortious measure and is thus subject to the test of remoteness, that is, damages which are reasonably foreseeable Negligent misrepresentation under s 2(1) As with s 2(2), there is no specific statement as to the measure of damages to be applied though the wording clearly suggests that a tortious measure is intended In Watts v Spence [1976] Ch 165 a contractual measure was used, but it would seem settled that this is wrong since, in Andre et Cie SA v Ets Michel Blanc et Fils [1977] Lloyd’s Rep 166 and latterly in Sharneyford Supplies Ltd v Edge [1985] All ER 976, it was decided that a correct measure was one based on tort Having decided that a tortious measure is appropriate, we must next ask whether the measure is based on negligence or on the tort of deceit As we have already seen, damages under the tort of deceit are wider, being based on causation and not being limited to those which may be reasonably foreseen as in negligence While there has been considerable debate over this question in the past, the Court of Appeal in Royscot Trust Ltd v Rogerson [1991] All ER 294 stated that s 2(1) was clear in that the correct measure was that based on the tort of deceit Balcombe LJ stated that the plaintiff was entitled to recover all losses even if those losses were unforeseeable, provided they were not otherwise too remote 249 www.downloadslide.com CHAPTER MISREPRESENTATION It may be the case that the decision in Royscot Trust Ltd v Rogerson will not ultimately decide this issue In Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] All ER 769, Lord Steyn questioned whether it was correct to ‘treat a person who was morally innocent as if he were guilty of fraud when it comes to the measure of damages’ The point was not developed, however, since it was irrelevant to the facts of the case Lord Steyn did nevertheless clarify the distinction between an action under s 2(1) and one under fraudulent misrepresentation He stated that in an action under s 2(1) the recoverable loss does not go beyond the consequences that arise from the negligent misrepresentation It can be seen immediately that this is narrower than the principle in Doyle v Olby (Ironmongers) Ltd [1969] QB 158, where the plaintiff is entitled to recover all loss directly flowing from the fraudulently induced contract, provided there is a causative link between the statement and the loss The difference between the calculation of damages in tort and the calculation in contract can be seen in the case of Naughton and Another v O’Callaghan Naughton and Another v O’Callaghan [1990] All ER 191 The facts of the case were that in September 1981 the plaintiffs bought a thoroughbred yearling for 26,000 guineas from the Newmarket sales The horse was trained in England and Ireland for two seasons but was unplaced in all the races it was entered for The horse’s lack of success meant that its value fell to £11,500 In June 1983 it was discovered that the horse’s pedigree had been incorrectly described in the sales catalogue because of an error at the stud farm where the horse was foaled Subsequent to this discovery further expenses were incurred and the following year the plaintiff purchasers purported to repudiate the contract, seeking the purchase price and training fees and expenses amounting to £14,734 Judgment was entered by default against the defendants and the stud farm In assessing the damages, evidence was produced that if the yearling had been correctly described it would only have fetched approximately 23,000 guineas at the sale The defendants and the stud farm contended that the plaintiffs had bought a horse of practically the same value as the one they had intended to buy and that therefore they were only entitled to the difference in value Further they contended that they were not liable for the training fees and other expenses since such expenses would have been incurred whatever horse had been purchased It was held that the correct measure of damages was the difference between the purchase price and the value of the horse at the time of the discovery of the misrepresentation, not the difference between the purchase price and the horse’s actual value at the time it was purchased As regards the expenses, it was decided that the plaintiffs were entitled to these since the plaintiffs were entitled to say that this was not the horse they thought they had bought and, as such, was not a horse that they would have spent money on training or keeping The expenses were moneys spent in reliance on the misrepresentation In other words, plaintiffs are entitled to be put into the same position they would have been in had they not entered into the transaction It should further be noted that in Gran Gelato Ltd v Richcliff (Group) Ltd [1992] All ER 865, Nicholls V-C held that damages awarded under s 2(1) could be reduced because of the contributory negligence of the plaintiff by virtue of the Law Reform (Contributory Negligence) Act 1945, s Contributory negligence has no application at all in actions for fraudulent misrepresentation, however, as held by Mummery J in Alliance & Leicester Building Society v Edgestop Ltd [1994] All ER 38 This decision in turn poses a particular problem since, presumably, contributory negligence should not 250 www.downloadslide.com THE REMEDIES AVAILABLE FOR MISREPRESENTATION then be applied to s 2(1) because the damages here are based on the fiction of fraud How can this apparent conflict be resolved? The answer to this problem seems to lie in Lord Steyn’s opinion that damages under s 2(1) are to be assessed on the narrower principle that recoverable loss is limited to the foreseeable consequences that arise from the negligent misrepresentation, rather than the ‘all loss’ principle in Doyle v Olby (Ironmongers) Ltd If that approach is taken then consistency should arise between the various authorities In Standard Chartered Bank v Pakistan National Shipping Corporation [2003] AC 959, however, Lord Hoffmann concurred with the view of Mummery J that there is no common law defence of contributory negligence in cases of fraudulent misrepresentation and stated that it follows that no apportionment of damages under the 1945 Act is therefore possible The reasoning appears to be based on an application of the rule in Redgrave v Hurd The basis of a contributory negligence claim is that a claimant could with reasonable care have discovered that the representation was untrue and in Redgrave v Hurd the court held that it would be incorrect for a person to make a false statement and then escape liability by stating that the representee could have discovered the truth Innocent misrepresentation Damages are not recoverable for innocent misrepresentation unless the court decides to exercise its discretion under s 2(2) and award damages in lieu of rescission The measure of damages for this is discussed below The measure of damages under s 2(2) As with s 2(1) this provision gives no express indication as to the measure of damages though both Treitel (2003) and Cheshire, Fifoot and Furmston (2006) indicate that the measure should be somewhat lower than those that may be awarded under s 2(1) There are two reasons for this proposition First, s 2(3) tends to suggest that a lower measure be adopted Section 2(3) provides: Damages may be awarded against a person 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 the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1) Second, damages under s 2(2) are to be awarded in lieu of rescission and since the purpose of this remedy is to effect a restitution between what the representee handed over and what the representee received then the damages awarded under s 2(2) should reflect such a measure Such a measure would therefore preclude sums representing consequential losses Surprisingly, there has been very little judicial consideration of the measure of damages under s 2(2) The issue has, however, been discussed in William Sindall plc v Cambridgeshire County Council [1994] WLR 1016 (CA), where both Hoffmann LJ and Evans LJ concurred that the measure is different from that which arises under s 2(1) since s 2(3) indicates this They considered that the measure should be an amount that compensates the plaintiff ‘for the loss he has suffered on account of the property not having been what it was represented to be’ Evans LJ was a little more explicit and stated that the measure of damages should be based on ‘the difference in value between what the plaintiff was misled into believing that he was acquiring, and the value of what in fact he received’ This measure was to be calculated at the time of the contract and consequential losses should not be taken into account 251 www.downloadslide.com CHAPTER MISREPRESENTATION Table 9.1 Summary of the remedies available for misrepresentation Rescission + Indemnity (available for all types of misrepresentation) Note the bars to rescission: Affirmation Lapse of time Restitution impossible Intervention of third parties Discretion to award damages under the Misrepresentation Act 1967, s 2(2) Damages Fraudulent misrepresentation Damages here are based on the tort of deceit, that is, on causation; therefore, damages are available for all loss, including consequential loss, providing there is a causative link: Doyle v Olby (Ironmongers) Ltd Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd East v Maurer Negligent misrepresentation at common law Damages are based on a tortious measure as found in the common law tort of negligence and thus only loss that is reasonably foreseeable may be recovered provided there is a ‘special relationship’ between the parties: Hedley Byrne & Co Ltd v Heller & Partners Ltd Caparo Industries plc v Dickman and Others Burden of proof is on the misrepresentee Negligent misrepresentation under the Misrepresentation Act 1967, s 2(1) No measure of damages is specified in s 2(1) but Royscott Trust Ltd v Rogerson indicated that damages here are based on the tort of deceit – see above This was questioned in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd and it was stated that in an action under s 2(1) the recoverable loss does not go beyond the consequences that arise from negligent misrepresentation – narrower than in Doyle v Olby (Ironmongers) Ltd above Burden of proof is on the misrepresentor to prove he was NOT negligent – a procedural advantage for the innocent party Innocent misrepresentation Damages are not recoverable unless the court exercises its discretion under s 2(2) Not the same measure as s 2(1) since s 2(3) states this William Sindall plc v Cambridgeshire County Council indicates a measure that compensates a claimant ‘for the difference in value between what the plaintiff was misled into believing that he was acquiring and the value of what in fact he received’ Consequential losses not available Remedies where the misrepresentation is also a term of the contract Condition Damages + Rescission Warranty Damages only Innominate term The Hong Kong Firr test applies: Has the party been substantially deprived of the whole of the benefit he would receive under the contract? (see pp 158 –62 ) Exclusion of liability for misrepresentation This area of exclusion is now covered by s of the Unfair Contract Terms Act 1977, which replaced and repealed s of the Misrepresentation Act 1967 This has already been discussed in Chapter 8, above 252 www.downloadslide.com SUMMARY Summary l A misrepresentation may be defined as a false statement of fact that induces another to enter into a contract The nature of the inducement l The untrue statement must be one of fact that induced the other party to enter the contract (Attwood v Small ) Statements of opinion l Honest statements of opinion will not amount to a misrepresentation (Bisset v Wilkinson) Statements of intention l A mere representation as to future conduct is not actionable either as a breach of contract or as a misrepresentation Silence as a misrepresentation of fact l Silence cannot amount to a misrepresentation l The three exceptions: (i) Change of circumstances (ii) The statement made is only half the truth (iii) Confidential/fiduciary relationships The fact of the inducement l To prove the inducement we must take certain factors into consideration The misrepresentation must be material Reliance The misrepresentation must have been relied on Truth known to the representee? l The representor has to prove that the representee knew of the untrue statement, e.g Redgrave v Hurd Representee unaware of the misrepresentation? l If the representee is unaware of the misrepresentation he cannot take action on the basis of it (Ex Parte Briggs) The nature of the misrepresentation Fraudulent misrepresentation l Definition: A ‘false statement made knowingly or without belief in its truth or recklessly careless whether it be true or false’ (Derry v Peek) Common law negligent misrepresentation l Hedley Byrne & Co Ltd v Heller & Partners Ltd 253 www.downloadslide.com CHAPTER MISREPRESENTATION (i) A representor had a duty of care to all that is reasonable to make sure that his statement is accurate (ii) Imposed a duty arising from a ‘special relationship’ Misrepresentation Act 1967, s 2(1) l Distinction between s 2(1) and negligent misrepresentation at common law (i) No need to prove a ‘special relationship’ (ii) The misrepresentation must result in a contract being entered into (iii) The burden of proof is reversed so that the representor is liable unless ‘he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true’ Innocent misrepresentation l Covers wholly innocent misrepresentations The remedies available for misrepresentation Rescission l The effect of misrepresentation renders the contract voidable, not void l A representee may affirm the contract by expressing his intention to so or by conduct l A representee can use misrepresentation as a defence by allowing himself to become liable for breach of contract l The representee may rescind the contract by making clear to the representor that he no longer considers himself bound l Failure to rescind a contract will mean that it is affirmed l Rescission is available for any type of misrepresentation Indemnity l Allows the representee to recover expenses incurred by the creation of the contract as a result of the misrepresentation l An indemnity is not the same as damages (Whittington v Seale-Hayne) Bars to the remedy of rescission A person may be barred from exercising the remedy of rescission in four circumstances l Affirmation l Lapse of time l Where restitutio in integrum has become impossible l The intervention of third parties Damages in lieu of rescission 254 l The right of rescission may be lost where the court decides to exercise its discretion under s 2(2) and award damages in lieu of rescission l NB: the discretion to award damages in lieu of rescission cannot be exercised in relation to fraudulent misrepresentation www.downloadslide.com FURTHER READING l Section 2(2) applies only where a person ‘would be entitled by reason of the misrepresentation to rescind the contract’ l In deciding whether or not to exercise its discretion the court has to take into account the degree of seriousness of the breach and the likely consequences of the exercise of the discretion on the representee and the representor, particularly in cases involving an innocent misrepresentation where the degree of loss is minimal Damages for misrepresentation Fraudulent misrepresentation l Damages are available at common law for fraudulent misrepresentation, the measure being a tortious one since the claim is based on the tort of deceit Negligent misrepresentation at common law l Damages based on remoteness (Hedley Byrne v Heller) Negligent misrepresentation under s 2(1) l Measure of damages suggests that a tortious application is needed ( Andre et Cie SA v Ets Michel Blanc et Fils; Sharneyford Supplies Ltd v Edge) Innocent misrepresentation l Damages are not recoverable unless the court decides to exercise its discretion under s 2(2) and award damages in lieu of rescission The measure of damages under s 2(2) l This provision gives no express indication as to the measure of damages l Suggestions are that damages are less than in s 2(1) for two reasons: (i) Section 2(3) provides: Damages may be awarded against a person 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 the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1) (ii) Damages under s 2(2) are to be awarded in lieu of rescission Exclusion of liability for misrepresentation l See the Unfair Contract Terms Act 1977, s Further reading Beale, ‘Damages in Lieu of Rescission for Misrepresentation’ (1995) 111 Law Quarterly Review 60 Beale, ‘Points on Misrepresentation’ (1995) 111 Law Quarterly Review 385 Beale, Bishop and Furmston, Contract – Cases and Materials, 4th edn (Butterworths, 2001) Beatson, Anson’s Law of Contract, 28th edn (Oxford University Press, 2002) Bigwood, ‘Pre-Contractual Misrepresentation and the Limits of the Principle in With v O’Flanagan’ [2005] Cambridge Law Review 94 255 www.downloadslide.com CHAPTER MISREPRESENTATION Brinkworth and Powell, ‘Fraudulent Misrepresentation: Dead or Simply Resting?’ (1992) 13 Business Law Review Furmston, Cheshire, Fifoot and Furmston’s Law of Contract, 15th edn (Oxford University Press, 2006) Spencer, Bower and Turner, The Law of Actionable Misrepresentation, 3rd edn (Butterworths, 1974) Treitel, The Law of Contract, 11th edn (Sweet & Maxwell, 2003) Vaughan, ‘Misrepresentation after “Humming Bird”: Not a Turkey’ (1988) 85 Law Society Gazette 28 premium Visit www.mylawchamber.co.uk/richards to access study support resources including sample exam questions with answer guidance, multiple-choice quizzes, flashcards, an online glossary, live weblinks and regular updates to the law, plus the Pearson e-Text version of Law of Contract which you can search, highlight and personalise with your own notes and bookmarks 256 A N Bisset v Wilkinson [1927] AC 177 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] All ER 474 R CASE Use Case Navigator to read in full some of the key cases referenced in this chapter with commentary and questions for comprehension: O VI G AT POWERED BY ... in writing Contracts required to be evidenced in writing Summary Further reading 90 90 90 91 92 95 96 97 97 97 97 10 4 10 9 11 1 11 2 11 2 11 2 11 3 11 4 11 8 12 3 12 4 Part The contents of the contract The... Paul, 19 51 Law of contract / Paul Richards – 10 th ed p cm ISBN 978 -1- 4082-53 61- 8 (pbk.) Contracts – England Contracts – Wales I Title KD1554.R53 2 011 346.4202–dc22 2 010 05 316 6 10 14 13 12 11 Typeset... Formalities Part The contents of the contract The terms of the contract Exemption clauses xv xviii xx xxxvi 13 60 90 97 11 2 12 5 12 7 16 5 Part Factors that vitiate a contract 229 10 11 12 2 31 Misrepresentation