Court of Appeal clarifies approach to ordering rescission for misrepresentation

Where a party has entered into a contract as a result of a misrepresentation, the question often arises as to whether it can unwind, or "rescind", the contract (eg in a sale of goods contract by returning the goods and getting back the money paid) or whether it is limited to claiming damages, which may not always be as advantageous (and may not be available at all if the misrepresentation was innocent). A recent Court of Appeal decision clarifies the court's approach: Salt v Stratstone Specialist Limited T/A Stratstone Cadillac Newcastle [2015] EWCA Civ 745.

The court considered two traditional bars to rescission: (i) where the parties cannot be restored to their pre-contract positions; and (ii) delay. On each the court took a flexible approach, emphasising that the question is whether "practical justice" can be done, including by ordering rescission on terms which allow the defendant to be compensated for any unfairness that would otherwise result. The decision may signal a greater willingness to allow claimants to unwind contracts entered into in reliance on a misrepresentation, in order to achieve a just result.

James Norris-Jones and Rebecca Murtha, a partner and senior associate in our disputes team, consider the decision below.

Background

The law

Where a party enters into a contract in reliance on a misrepresentation, the remedies available depend on whether the misrepresentation was fraudulent, negligent or innocent:

• In all such cases, the innocent party may seek rescission – an equitable remedy which means the contract is set aside and the parties are restored to the position they were in prior to entering into a contract.
• In a case of a fraudulent or negligent misrepresentation, the innocent party may seek damages instead of or in addition to rescission, either at common law or under section 2(1) of the Misrepresentation Act 1967.
• In a case of negligent or innocent misrepresentation, the court may award damages in lieu of rescission under section 2(2) of the Act.

Rescission is not available in certain circumstances, including where the contract has been affirmed by the innocent party, third party rights have intervened, an excessive time has elapsed, or the subject of the contract cannot be restored, rendering it impossible to restore the parties to their original positions.

The facts

In the present case, the claimant purchased a car in September 2007 following the defendant's representation that the car was "brand new". In fact, although the car had never been registered, it was two years old, had had various repairs and had been damaged in a collision.

The car had numerous defects which emerged after the purchase. The defendant repaired some of these, but in September 2008 the claimant tried to reject the vehicle and asked for his money back. The defendant refused, so in March 2009 the claimant issued proceedings claiming damages. In the course of disclosure, he discovered that the vehicle was not in fact new at the time of purchase, so he amended his claim to plead misrepresentation and claim rescission.

The court found that the claimant had relied upon the misrepresentation and would not have bought the car if he had been aware of its age and history. However, the District Judge held that he could not order rescission because he could not put the parties back in their original position. He held that the claimant was confined to a remedy in damages, which he assessed at £3,250.00 (the difference between the value of the car if new and its actual value at the time of purchase, plus a small sum for inconvenience).

The Circuit Judge reversed that decision and ordered rescission. The defendant appealed.

Decision

The Court of Appeal dismissed the appeal, finding that: (i) restitution was not impossible; and (ii) the delay that had taken place was not a bar to rescission.

Possibility of restitution?

The District Judge's reasons for concluding that restitution was impossible included the fact that a car is a depreciating asset and so the delay had prejudiced the defendant, and also that the claimant had had the benefit of using the car in the intervening period.

The Court of Appeal disagreed, finding that neither depreciation nor intermittent enjoyment should be regarded as reasons for saying restitution is impossible. Rescission is, the court said, prima facie available if "practical justice" can be done. Such "practical justice" might require a defendant to be compensated for depreciation, or for the use enjoyed by the claimant, but that would be for the defendant to assert and prove.

On the facts in this case, the court found that the absence of evidence about depreciation or the value of the use of the car should not operate to the disadvantage of the claimant, who should never have been put in the position of having a troublesome old car rather than a brand new one.

Delay?

The Court of Appeal found that lapse of time on its own could not be a bar to rescission in this case. The claimant had only discovered the misrepresentation during the course of disclosure in the action. Most of the subsequent delay had been due to the litigation process and the defendant's wrongful refusal to accept the return of the car.

The Court of Appeal referred to Leaf v International Galleries [1950] 2 KB 86 in which rescission was not permitted on the basis that a defendant to a misrepresentation claim should not be in a worse position than someone who had made the misrepresentation a term of the contract.

In the present case, the point did not arise on the pleadings as to whether the claimant was entitled to reject the car. However, the Court of Appeal noted that Leaf was decided well before the Misrepresentation Act was passed. Given that section 1 of the Act provides that rescission is available even if a misrepresentation has become a term of the contract, the court said it must be doubtful whether Leaf is still good law.

Damages in lieu of rescission

The Court of Appeal also considered conflicting first instance decisions relating to damages awarded in lieu of rescission under section 2(2) of the Misrepresentation Act, and in particular whether damages may be awarded under this section if there is a bar to rescission.

The Court of Appeal confirmed that if rescission is not available as a matter of law, a court will have no discretion to award damages under section 2(2) of the Act. It may however be able to award damages under section 2(1), unless the defendant proves he had reasonable grounds to believe (and did believe) that the misrepresentation was true.