To err is human: no misrepresentation found for false information on performance
20 April 2022
In SK Shipping v Capital VLCC, the Court of Appeal found that false information on vessel performance did not give rise to an actionable misrepresentation, since it was not in fact relied upon. The court also made interesting observations on the commercial difficulties arising from a provision of the Misrepresentation Act that allows damages to be awarded, and for the contract to remain in place, even though the claim is for it to be brought to an end. While this case is about shipping, it's a helpful illustration of how misrepresentation is dealt with more generally.
SK Shipping, the shipowners, and Capital, the charterers, entered into a contract. Before negotiations, SK Shipping circulated inaccurate information to the market on the vessels’ recent fuel consumption. The contract also contained warranties from SK Shipping about vessel performance. Subsequently, the vessels failed to perform as expected and Capital sought to rescind the contract (ie bring it to an end) on the basis of misrepresentation. There are three points I would like to highlight:
First, the alleged misrepresentation. Both parties accepted that SK Shipping had made representations about the vessels’ past performance. However, Capital contended that the information circulated by SK Shipping also contained an implicit representation that SK Shipping expected the vessel to achieve “substantially the same performance in the future”.
This was rejected by the court. It found that a charterer familiar with the market would not have taken information about past performance to be a representation as to future performance. Additionally, the court emphasised that a “misrepresentation should not be too easily found”, on the basis that it “leads to damages on the fraud basis” and also the “drastic consequence” of rescission.
Separately, Capital contended that SK Shipping’s offer to contract on certain terms also amounted to a misrepresentation as to the vessel’s fuel consumption. Although Capital accepted that an offer to contract will not generally amount to a representation about future performance, Capital argued that the inaccurate information provided by SK Shipping had become “embedded” in the contractual terms. On that basis, the offer to contract on those terms was arguably a repetition of the inaccurate information.
This, too, was rejected by the court. The court doubted whether there was a “general rule that, merely by offering to contract, a party represents that it is able and willing to perform the contract, even with the qualification that the representation is limited to performance of the obligations which the party understands itself to be offering to undertake”. In any event, on the facts, the court found that SK Shipping had “deliberately not repeated” the false information during the course of further negotiations, and therefore this could not have been “embedded” in the contractual terms.
Second, the question of inducement. The court accepted that that the false information circulated was “material” in the sense that “it was likely to induce the contract”. However, this only gave rise to a rebuttable inference of fact that there was inducement. On the facts, the court found that there was “ample evidence” to rebut this inference. In particular, the terms offered by SK Shipping were “attractive”, and “what really mattered to the Charterer was the performance warranty which the Owner would give: if the vessel over-consumed, the Charterer would be compensated”.
Damages instead of rescission
Finally, the court made a number of observations about section 2(2) of the Misrepresentation Act 1967. This provision allows a court to reject a claim for rescission and award damages instead (so leaving the contract in place).
The court acknowledged the provision “was not free from difficulty” [Ed.: it gives most law students and lawyers nightmares]. In a case where “the contract has come to an end by the time the court adjudicates”, it was difficult to see how a court could declare the contract to be subsisting.
Additionally, the court acknowledged the uncertainties faced by commercial parties as a result of the provision. A party faced with a misrepresentation is left with a dilemma: either they choose to rescind (and potentially face liability for breach of contract if the contract is later held to subsist), or they continue to perform (and potentially lose large sums of money in the course of performance which they may not recover). It was “unrealistic” to say that a party could always make an urgent application to a court or arbitral tribunal to avoid such difficulties.
Nevertheless, the court refrained from expressing a firm view on how the provision should be interpreted, leaving this difficult question “for decision in a case where it matters”. In this case, Capital’s claim for misrepresentation was unsuccessful and thus there was no need to consider the provision formally.
Judgment: SK Shipping v Capital VLCC