Court of Appeal rules contract can be rescinded for negligent misrepresentation

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In the case of Salt v Stratstone Specialist Ltd, the Court of Appeal has upheld a decision of the High Court that a contract for the sale of a car could be rescinded for negligent misrepresentation. The case reviewed the application of some general contract law rules that can apply more widely.

Facts

Mr Salt, a car enthusiast, bought a Cadillac sport luxury car from Stratstone Specialist Ltd in 2007. Prior to purchase he was told that the car was “brand new”, although this turned out not to be the case. While the car had not been registered, it was delivered to the car dealership in 2005 and following a serious collision, it had been repaired. Following Mr Salt’s purchase the defects started coming to light.

Stratstone repaired some of the defects, though by 2008 Mr Salt tried to reject the vehicle and seek his money back. This was rejected by the car dealership and Mr Salt issued proceedings claiming that the car was not of merchantable quality and seeking damages.

Through disclosure, Mr Salt discovered that the car was not “brand new” and amended the particulars of claim claiming misrepresentation and rescission.

In the County Court, the District Judge held that he could not order rescission because he could not put the parties back in their original place as the car had been registered and it was impossible for it to become unregistered; there was a considerable lapse of time; and it would be impossible to calculate the price repayable.

Mr Salt appealed and the High Court reversed the County Court decision on the basis that it was possible to restore the parties to their original position. This was because the car still existed; the matter of registration could not be a bar to rescission; the value of the car should be at the risk of the representor and not the representee; and the delay in this case was not so long as to bar rescission. Stratstone disagreeing with this decision brought an appeal.

Court of Appeal Decision

One of the first questions to be dealt with by the Court was whether the judge in the High Court had wrongly interfered with an exercise of discretion under section 2 (2) of the Misrepresentation Act 1967 (MA 1967). In effect that section provides that where a person has entered into a contract by misrepresentation and he is entitled to rescind the contract, the court does have the discretion to award damages in lieu of rescission providing certain conditions are fulfilled. In this regard Lord Justice Longmore said that “in lieu of rescission” carries with it the implication that rescission is available or was available at the time the contract was rescinded. However, it if it is not and the reasons given include because the contract has been affirmed or an excessive time has lapsed or restitution has become impossible then rescission is not available and so there is no discretion to award damages “in lieu of rescission”.

Another important question in this case was whether restitution had become impossible. In this regard the Court found that registration of a car is a legal concept and it does not change the physical entity of the product. Additionally, while there was depreciation and intermittent enjoyment of the car by Mr Salt neither of these points according to the Court can be regarded as reasons for saying that restitution was not possible in this case.

The Court recalled that in a case where misrepresentation was argued the normal remedy was rescission and that such a remedy should be awarded where possible particularly in case where the defendant makes no attempt to prove that he had reasonable grounds to believe its representation was true. In terms of the damages that Mr Salt can receive, as rescission is the normal remedy for misrepresentation unless it is truly impossible, the Court said that Mr Salt should receive the price of £21,895 which he paid. Damages of £3,250 would not have been sufficient.

The Court also considered the issue of lapse of time. The case of Leaf v International Galleries was considered where rescission of a contract for the purchase of a painting wrongly represented to be by “J Constable” was barred by delay of four years. In the present case there was also a delay of four years, which Stratstone argued precludes rescission. However, the Court said that as Mr Salt only became aware of the misrepresentation after disclosure it would be unfair to allow Stratstone to rely on lapse of time as a bar to rescission. Therefore, in the present case the Court found that it could not accept that lapse of time can be a bar to rescission.

Impact

This decision clarifies that discretion to award damages in lieu of rescission is only available if the remedy of damages was available in the first place. Additionally, if a party has lost its right to seek rescission then it should seek damages under section 2(1) of the MA 1967. This case also demonstrates that rescission is a normal remedy to misrepresentation unless it is truly impossible to put the parties back in their original position. When dealing with goods that depreciate in value, one may have the view that this would preclude restitution due to the difficulty in calculating the value, although as the Court has found this cannot be taken as a rule of thumb. In deciding whether restitution is possible different factors can be taken into account and the circumstances of the case can be especially important.

Forbes Solicitors assist businesses and organisations with drafting contracts and provide advice in the event that contractual disputes arise. If you would like advice on any of the related issues please contact Daniel Milnes.

Daniel Milnes

About Daniel Milnes

Dan is a Partner and Head of Contracts & Projects. Dan’s blogs cover the areas in which his specialities lie in commercial, regulatory and governance law which cover a broad range of matters dealing with contracts, projects, corporate and group structures, funding and compliance with a range of legal regimes including data protection. This also involves writing and advising on various forms of commercial contracts including joint ventures, development and construction agreements and intellectual property contracts including IT agreements, sponsorships and other rights licensing arrangements.
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