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Innocent misrepresentation: damages only available if rescission is possible too

30 September 2015

In a claim for innocent misrepresentation the Court of Appeal held in Geoffrey Alan Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745, 16 July 2015, that a court will only be able to award damages under s2(2) of the Misrepresentation Act 1967 as an alternative remedy to rescission if rescission itself is also available as a remedy. This ruling brings some clarity in an area where there have been inconsistent lower court rulings on the issue. The Court of Appeal has further confirmed that a lapse of time may serve as a bar to rescission, but only where the lapse of time is reasonable such that it would be inequitable in all the circumstances to grant the rescission. What is reasonable will require close attention to the specific facts of the case.

This case concerned the interpretation of s2 of the Misrepresentation Act 1967 (the Act). s2(2) empowers a court to award damages in lieu of rescission as a remedy for innocent misrepresentation. A court also has the power under s2(1) of the Act to award damages for fraudulent or negligent (ie non-innocent) misrepresentation.

A "brand new" car

In September 2007, Geoffrey Alan Salt (Mr Salt), the claimant, bought over the telephone a luxury car from Stratstone Specialist Ltd (Stratstone), which described the car as "brand new". 

A number of defects began to emerge following Mr Salt's purchase of the car and in September 2008, Mr Salt tried to return the car and obtain a refund. Stratstone refused and in March 2009 Mr Salt started proceedings in the Milton Keynes County Court complaining that the car was not of merchantable quality and seeking damages. During disclosure it was revealed that the car had been manufactured in 2005 (rather than 2007) and was not in fact brand new, as described by Stratstone; rather it had, at the point of sale, no registered owner. Mr Salt amended his particulars of claim in May 2011, claiming misrepresentation and rescission.

Lower court proceedings

At first instance, the county court held that rescission of the contract was not possible because the parties could not be put back into their pre-contractual positions. This was because: (i) the car had now been registered and could not be returned as an unregistered car; (ii) a considerable amount of time had elapsed since the sale; and (iii) the court did not have sufficient evidence to calculate the amount repayable taking into account the depreciation in the value of the car. Instead, the Court awarded damages of GBP 3,250. This award represented the difference between the value of the car had it in fact been brand new and the actual value of the car at the time of purchase, together with GBP 250 in damages for the inconvenience the defects caused to Mr Salt.

On appeal, His Honour Judge Charles Harris QC overturned the County Court decision holding that rescission was possible and ordering Stratstone to repay the purchase price in return for the car. Stratstone appealed to the Court of Appeal.

Court of Appeal

Damages under s2(2) of the Act

As a preliminary matter, the Court of Appeal held that a court will only have the power under s2(2) to award damages in lieu of rescission as a remedy for innocent misrepresentation if rescission itself is also available as a remedy (ie it is possible to put the parties back into their pre-contractual positions). Previously there had been no Court of Appeal authority on this point.

Was rescission available?

The Court of Appeal held that it was possible to restore the parties to their pre-contractual positions because:

1.      registration of the car is a legal concept which did not physically change the car;

2.      there had not been a reasonable lapse in time as to make rescission inequitable, mainly because Mr Salt was only made aware of Stratstone's misrepresentation during document disclosure in the first instance proceedings; and

3.      Stratstone could be compensated for the depreciation in the value of the car. The onus was on Stratstone to assert and prove its entitlement to compensation, which it did not do.

Rescission as the normal remedy

Delivering the lead judgment, Lord Justice Longmore (citing, with approval, the decision in British and Commonwealth Holdings v Quadrex [1995] CLC 1169, 1199-1200) noted that rescission is the normal remedy for misrepresentation and should be awarded if possible, particularly in circumstances in which a defendant makes no attempt to prove it had reasonable grounds to believe its representation was true.

Stratstone's appeal was dismissed.

Lapse of time: what is reasonable?

Mr Justice Roth commented that a lapse of time will only operate as a bar to rescission in circumstances where the lapse of time is reasonable such that it would be inequitable in all the circumstances to grant rescission. Determination of what is reasonable will require close attention to the facts of the case.

Comment: This case clarifies that, in a claim for innocent (as opposed to fraudulent or negligent) misrepresentation, damages under s2(2) of the Act may only be awarded, as an alternative remedy to rescission, where rescission itself is also available (ie where it is possible to put the parties back into their pre-contractual positions). There has been a divergence of views on this in lower courts.1

The case confirms that rescission is the normal remedy for misrepresentation and that, where possible, a court should award this remedy rather than damages. In deciding whether to award damages in lieu of rescission under s2(2), the court will favour the remedy that is most equitable, exercising a broad discretion which includes considering the likely effect on both parties of permitting the contract to continue.

Where rescission is available, "practical justice" may entitle a representor (in this case Stratstone) to compensation for the depreciation in the value of property returned as a result of the rescission (in this case the car). The onus is on the representor to assert and prove such an entitlement.

Footnote:

1. See, for example, the decision in Alton House Garages (Bromley) Ltd v Monk (1981) (Unreported) in which the court held that damages under s2(2) were not available if rescission was barred, and the decision in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All E R 573, in which the Court took the contrary view.

 

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