Misrepresentation and rescission

Misrepresentation arguments could be described in one of my favourite phrases, as the gift that never stops giving. I have lost count of the number of times I have argued the same point in various incarnations: misrepresentation, mistake, collateral contract etc etc. The points just keep coming.

Sometimes it is argued that a claimant under pressure in the witness box has avoided the contract: confronted with the credit hire agreement they declare that they were unaware of the charges and will not pay. It is then contended by the defendant’s counsel that the agreement has been “avoided” and the client has no liability to pay the charges.

The county court judge nodding sagely, declares that because of the misrepresentation and avoidance the agreement must be “unenforceable” and assess damages at nil.

I have read a number of county court decisions to this effect. They are all unreported and so to cite them in further cases might offend both the provisions of the Practice Direction (Judgments: form and citation) [2001] 1 WLR 194 (noted at page 2538 in the White Book) and the Practice Direction: Citation of Authorities [2012] 1 WLR 780 (noted at page 2543 in the White Book. There is ample authority on the doctrines of misrepresentation, avoidance and rescission without the need to rely on non binding county court decisions.

Instinctively it seems a surprising contention that a party may obtain release from all her contractual obligations, by purporting to orally disclaim a written contract and if she does so, this has immediate effect through the doctrine of avoidance and rescission and binds a party neither present nor represented in court and not a party to the court proceedings.

In point of fact such a contention is devoid of support in the authorities.

Almost a century ago, the House of Lords established the relationship between a party’s election to rescind a contract and the necessary role of the courts to give effect to that election. In Abram Steamship Co v Westville Shipping Co [1923] AC 773  Lord Atkinson said in his speech:

Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in statu quo ante and restores things, as between them, to the position in which they stood before the contract was entered into. It may be that the facts impose upon the party desiring to rescind the duty of making restitutio in integrum. If so, he must discharge that duty before the rescission is, in effect, accomplished; but if the other party to the contract questions the right of the first to rescind, thus obliging the latter to bring an action at law to enforce the right he has secured for himself by his election, and the latter gets a verdict, it is an entire mistake to suppose that it is this verdict which by itself terminates the contract and restores the antecedent status. The verdict is merely the judicial determination of the fact that the expression by the plaintiff of his election to rescind was justified, was effective, and put an end to the contract. Questions as to whether the judgment relates back to a date earlier than its own are really irrelevant. So long ago as the year 1804 this was *782 in effect decided by Lord Ellenborough C.J., Grose, Lawrence and Le Blanc JJ., in the case of Hunt v. Silk. 9 It was there laid down “that a contract cannot be rescinded by one party for the default of the other, unless both can be put in statu quo as before the contract.” This decision was approved of and followed in Blackburn v. Smith.

(emphasis added)

Accordingly per Abram Steamship it can be observed, that the correct statement of principle is that although in law a contract will be rescinded by the action of the rescinding party, where that purported rescission is disputed by the other party to the contract, an action at law must be brought to obtain a judicial determination of the fact that the expression of rescission was justified and effective and which will make rescission binding upon both parties by order of the court.

It is hard to see how it could be otherwise: many people have onerous contractual obligations that they would like to disclaim, but the notion that simply alleging misrepresentation and uttering some “magic words” that they are not going to pay has the effect of altering the substantive rights of the other party without recourse to the courts, is nonsensical.

As the claimant will not have brought proceedings to impeach the contract of credit hire and the credit hire company will not have admitted the misrepresentation nor been joined to an action for the purpose of making any election to rescind effective, the contract will be at best potentially voidable, on the basis of findings that do not bind the credit hire company it follows that the statement of principle of Dyson LJ in Islington London Borough Council v Uckac [2006] EWCA Civ 340 is not only correct, it is consistent with House of Lords authority, now nearly 100 years old.

Moreover there are further statements of principle to like effect in other analogous cases e.g.: where a third party attempted to argue that a conditional fee agreement it was not a party to, was obtained by undue influence and should be treated as void by the court, so the third party could obtain a windfall. Rejecting that argument in Forde v Birmingham City Council [2009] 1 WLR 2732 the court ruled:

But an agreement obtained by the exercise of undue influence is voidable , not void. It remains in effect unless the person influenced seeks to set aside the contract and the court allows her to do so; such relief may be given on terms, eg as to payment of a reasonable sum for services actually rendered: Johnson v EBS Pensioner Trustees Ltd [2002] Lloyd’s Rep PN 309, paras 76–80 and O’Sullivan v Management Agency and Music Ltd [1985] QB 428 . There is no evidence that Miss Forde has done anything to avoid CFA 2. On the contrary she has consented to these proceedings being brought by McGrath on her behalf. What the council cannot do is to purport to avoid CFA 2, to which it is not a party, on her behalf and in defiance of her wishes; nor is the court required to proceed on the basis that she has avoided it when she has not.

(emphasis added)

A claimant cannot “void” the contract by making declamations from the witness box. That contract remains unless and until it is declared voidable and voided by the court. Simple expressions of intent are writ in water so far as the credit hire company is concerned. Moreover, there are other conceptual difficulties.

A right to avoid the contract and claim rescission is not unqualified. It can be lost in several ways. It can be lost by affirmation. It can be lost by the impossibility of restituto integrum. It can be lost by the effluxion of time. As noted in Forde rescission can also be granted on terms: in the context of alleged misrepresentation, the court has a discretion to refuse rescission and may make an award of damages as appropriate instead per section of the Misrepresentation Act 1967.

But in most cases a claimant will have affirmed the contract. She will have appointed solicitors. She will have brought proceedings. She will have claimed the cost of the credit hire. She will have made a witness statement claiming the cost of the credit hire. She will have attended trial to give evidence ostensibly in support of her claim and witness statement.

She will have done these things, notwithstanding her account of misrepresentations that she had full knowledge of from the date the credit hire contract was made. Per Peyman v Lanjani [1985] Ch 457 these can be argued to be  unequivocal acts which demonstrate the affirmation of the contract.

The final and simplest point is that avoidance and rescission after performance of the hire contract will be  impossible: the claimant will have enjoyed the full benefit of the contract for services using a hire car provided to her by the credit hire company. It is a requirement of rescission that the contract is unwound, by the party seeking rescission returning the benefit she has received under the contract. Unlike a contract for the sale of goods, where the goods can simply be given back, it is not possible for her to make restitution of these services. Rescission will be impossible, as restitution is impossible.

3 thoughts on “Misrepresentation and rescission

  1. Andrew,

    Whilst I fully agree with what you are saying in relation to rescission of credit hire agreements for alleged misrepresentation, there is a subtly in the argument that I have seen in that the Defendants suggest that the misrepresentation goes to the issue of need.

    Ie a claimant says ‘if i thought i had to pay I would not have hired, i would have done with out.’

    This is often the finding the Judge makes when wanting to find a reason to dismiss the special damages for hire.

    The fallacy of course with the judge’s determination is that just because a person would have chosen not to hire does not mean they had no need.

    But we also claim general damages for loss of use in the same amount at the hire invoice as an alternative.

    1. I think general damages for loss of use should always be claimed. Per Bee v Jenson, and the later cases, all of these claims are claims for loss of use, with hire charges pleaded as special damages by convention.

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