Law of Contract II

• A misrepresentation may be:

– Fraudulent misrepresentation
– Negligent misstatement at common law
– Innocent misrepresentation
 Note that in UK, there is also:
 Negligent misrepresentation under the
Misrepresentation Act 1967. This Act is however
NOT applicable to Jamaica
 Fraudulent misrepresentation is a false
statement within the definition in Derry v
Peek.
 It is a tort and is sometimes referred to as
deceit. The parties, therefore, may or may
not be parties to a contract.
• Classic definition of fraud was made by Lord Herschell in Derry v
Peek [1886-1990 All ER Rep 1 in the House of Lords:
– “First in order to sustain an action of deceit, there must be proof of
fraud, and nothing short of that will suffice. Secondly, fraud is proved
when it is shown that a false representation has been made (i)
knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless
whether it be true or false. Although I have treated the second and
third as distinct cases, I think the third is but an instance of the second,
for one who makes a statement under such circumstances can have no
real belief in the truth of what he states. To prevent a false statement
being fraudulent, there must, I think, always be an honest belief in its
truth. And this probably covers the whole ground, for one who
knowingly alleges that which is false has obviously no such belief.
Thirdly, if fraud is proved, the motive of the person guilty of it is
immaterial. It matters not that there was no intention to cheat or
injure the person to whom the statement was made.”
• The action brought by the respondent, Sir Henry Peek, to recover from the
appellants, the directors of the Plymouth, Devonport, and District Tramways Co,
Ltd, damages for misstatements alleged to have been contained in a prospectus
issued by them, by which he asserted that he was induced to act to his prejudice
by taking shares in the company. The misrepresentation in the prospectus
complained of was that the company had the right to use steam or other
mechanical power, when in fact they had no such right, but only a contingent
possibility of obtaining that right dependent on the consents of the Board of
Trade and of the corporations of Plymouth and Devonport, which consents were
subsequently refused as to a most material portion of the line. The respondent,
on the faith of the prospectus, applied for 400 shares in the company, which were
allotted to him, and in respect of which he paid £4000. The company was
compulsorily wound-up in May 1885. At the trial in March 1887, STIRLING, J,
dismissed the action for damages on the ground that the appellants had made
the statements in the prospectus bona fide and not with any intention to deceive.
The Court of Appeal held that, the statements in the prospectus being untrue and
the appellants knowing them to be untrue or having no reasonable ground for
believing them to be true, it was immaterial whether they had any intention to
deceive the public, and that they were responsible to any person who in fact
acted on their statements. The directors appealed to the House of Lords.
• Held: Appeal allowed. The House of Lords saw no reason to depart
from the trial judge’s finding of fact that the defendants honestly
believed their statements to have been a true and fair
representation of the facts. Accordingly, although the statements
were in fact false, the charge of fraud made against them was not
established.
• Lord Herschell, however, made the point that an action for deceit
differs from an action to obtain rescission of the contract on the
ground of misrepresentation of a material fact. If rescission was
claimed it would only have been necessary to prove that there was
misrepresentation, however honestly it may have been made.
Once a contract is obtained by misrepresentation it cannot stand.
In an action of deceit, on the contrary, it is not enough to establish
misrepresentation alone.
• A party who has been deceived by fraudulent
misrepresentation may sue for damages in tort
for deceit.
• In addition may affirm the contract or disaffirm
the contract and refuse further performance.
– Where a party disaffirms the contract, he may either:
• Take no legal action, and plead fraud as a defence and
counterclaim for damages in the event of being sued for
breach of contract by the other party; or
• Bring an action for rescission of the contract.
• East v Maurer [1991] 2 All ER 733
– The first defendant owned and managed two successful hair salons in the same town and built
up a considerable local reputation as a hair stylist. In 1979 the plaintiffs bought one of the
salon businesses for £20,000, being induced to do so in part by a representation made by the
first defendant that he had no intention of working in the other salon except in emergencies
and that he intended to open a salon abroad. In fact the first defendant continued to work
full-time at the other salon with such an adverse effect on the plaintiffs' business that it was
never profitable and they were forced to sell it in 1989 for £7,500. The plaintiffs brought an
action for damages against the first defendant and the company through which he traded
alleging breach of contract and fraudulent misrepresentation. The judge found that the
representations made by the first defendant were false and awarded the plaintiffs damages of
£33,328 consisting of separate awards for the loss incurred on the sale of the business, fees
and expenses incurred in buying and selling the business and making improvements, trading
losses incurred by the plaintiffs, and disappointment and inconvenience, and an award of
£15,000 for loss of profits based on the profits which the first defendant would have made
from the salon if he had not sold it, less a 25% deduction for the plaintiffs' lesser experience.
The defendants appealed against the award for loss of profits, contending that damages for
loss of profits were not recoverable in an action for deceit because such damages were
confined to a breach of a contractual warranty of profits and even if they were recoverable the
judge had assessed the damages on the wrong basis.
 Held - Loss of profits could be recovered in an
action for deceit as being actual damage directly
flowing from the fraudulent representation.
However, they were to be assessed on the basis of
compensating the plaintiff for all the loss he had
suffered and not, as in breach of contract, on the
basis of putting the plaintiff in as good a position
as if the statement had been true.
• Doyle v Olby (Ironmongers) [1969] 2 All ER 119
– The plaintiff saw an advertisement of an ironmongers' business for sale at £4,500 for the
lease, business and goodwill, the stock to be taken at a valuation. He made inquiries, and the
company's director produced accounts for the preceding three years which showed
considerable annual profits. The director's brother told the plaintiff, inter alia, that all the
trade was over the counter. The plaintiff agreed to buy and went into occupation under a new
lease at a higher rent, but with a covenant that the vendors would not engage in a similar
business within a 10-mile radius for five years. Having undertaken liabilities of some £7,000,
he soon found that the turnover had been misrepresented and, in particular, that half the
trade had been obtained by the director's brother acting as part-time traveller at £555 a year;
and shortly after he took over, an associated company began to canvass the vendors' former
customers in the district. The plaintiff began an action against the two companies, the
director, and his brother, for damages for fraud and conspiracy. Meanwhile, after three years'
disastrous efforts to trade, he sold the business, but was left with liabilities of some £4,000. At
the trial Swanwick J. found all the defendants guilty of fraud and conspiracy and awarded the
plaintiff damages of £1,500 calculated on the basis suggested by counsel for the plaintiff in his
closing speech, namely, two and a half times the cost of employing a part-time traveller at
£600 a year, as equivalent to the cost of making good the representation or the reduction in
the value of the goodwill. The plaintiff appealed against the amount of damages.
– Held, allowing the appeal: (1) that the court could apply the proper
measure of damages for deceit despite the fact that the wrong
measure was proposed by the plaintiff's counsel at the trial, for the
court would not let a man with a just claim suffer by reason of his
counsel's mistake unless it were shown that to take a different course
would do injustice to the defendants; and that had not been shown. 
– (2) That the proper measure of damages for deceit, as distinct from
damages for breach of contract, was all the damage directly flowing
from the tortious act of fraudulent inducement which was not
rendered too remote by the plaintiff's own conduct, whether or not
the defendants could have foreseen such consequential loss. The
plaintiff's position before the fraudulent inducement should be
compared with his position at the end of the transaction. As in the
instant case the plaintiff had been tricked into buying a business which
he would otherwise not have bought at all, the court should award
him his overall loss up to his final disposal of the business, less any
benefits he had received.
• Smith & New Court Securities Ltd v Scrimgeour Vickers [1996] 4 All ER 769
– In July 1989 the plaintiff company, SNC, purchased a parcel of 28,141,424
shares in F Inc which had been pledged to a bank as security for a loan made
by the bank to a client. When the client defaulted the bank forced a sale of the
shares through the first defendants, stockbrokers owned by the bank. SNC
was under the impression that it was in competition with two other bidders for
the shares and bid a price of 82p per share, making a total consideration of
£23,141,424 for the parcel. In September an announcement by F Inc that it had
been the victim of a major fraud had a disastrous effect on its share price.
Between November 1989 and April 1990 SNC sold the shares at prices
between 30p and 40p, realising a total of £11,788,204 at a loss of £11,353,220
on the transaction as a whole. When the share price collapsed SNC
investigated the circumstances of its purchase of the shares and discovered
that there had not been two other bidders at the time of the sale. SNC
brought proceedings against the first defendants and the bank claiming
damages for fraudulent misrepresentation. SNC alleged that it had been
induced to enter into the transaction by three false representations made by
R, a senior executive of the bank and a director of the first defendants.
– Held by the House of Lords: the primary rule was that a victim of fraud was
entitled to compensation for all the actual loss, including consequential loss,
directly flowing from the transaction induced by the deceit of the wrongdoer.
The normal method of calculating the loss caused by the deceit was prima
facie the price paid less the real value of the subject matter of the sale as at
the date of the transaction or acquisition by the plaintiff. However, since the
overriding principle was that the plaintiff should receive full compensation for
the wrong suffered and the date of transaction rule was only a means of
attempting to give effect to the overriding compensatory rule, that rule did
not apply where either the misrepresentation continued to operate after the
date of the acquisition of the asset so as to induce the plaintiff to retain the
asset, or the circumstances of the case were such that the plaintiff was, by
reason of the fraud, locked into the property. Any assessment of damages was
limited by the normal rules relating to causation, remoteness and mitigation
except that in the case of remoteness the victim of the fraud was entitled to
compensation for all the actual loss directly flowing from the transaction
induced by the wrongdoer, including heads of consequential loss, and not
merely loss which was reasonably foreseeable.
 Negligent misrepresentation occurs where
there is a fiduciary relationship between the
parties.
 In Nocton v Lord Ashburton [1914] AC 932 this was
applied by the House of Lords to negligent advice
given by a solicitor to his client.
 The principles are illustrated in Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] AC
465.
• A bank inquired by telephone of the respondent merchant bankers concerning the
financial position of a customer for whom the respondents were bankers. The bank
said that they wanted to know in confidence and without responsibility on the part of
the respondents, the respectability and standing of E Ltd and whether E Ltd would be
good for an advertising contract for £8,000 to £9,000. Some months later the bank
wrote to the respondents asking in confidence the respondents' opinion of the
respectability and standing of E Ltd by stating whether the respondents considered E
Ltd trustworthy, in the way of business, to the extent of £100,000 per annum. The
respondents' replies to the effect that E Ltd was respectably constituted and
considered good for its normal business engagements were communicated to the
bank's customers, the appellants. Relying on these replies the appellants, who were
advertising agents, placed orders for advertising time and space for E Ltd on which
orders the appellants assumed personal responsibility for payment to the television
and newspaper companies concerned. E Ltd went into liquidation and the appellants
lost over £17,000 on the advertising contracts. The appellants sued the respondents
for the amount of the loss, alleging that the respondents' replies to the bank's
inquiries were given negligently, in the sense of misjudgment, by making a statement
which gave a false impression as to E Ltd's credit. Negligence was found at the trial
and contested on appeal; the appeal was determined, however, on the assumption
that there had been negligence, but without deciding whether there had or had not
been negligence.
• Held - Although in the present case, but for the
respondents' disclaimer, the circumstances might have
given rise to a duty of care on their part, yet their
disclaimer of responsibility for their replies on the occasion
of the first inquiry was adequate to exclude the
assumption by them of a legal duty of care, with the
consequence that they were not liable in negligence.
• The Court, however, did not attempt to precisely define
the circumstances in which an action in negligence would
lie. It was made clear, however, that liability for negligent
statements depends on the existence of a ‘special
relationship’ between plaintiff and defendant, and the
relationship does not necessarily involve direct contact
between the parties.
 It appears as well that a claimant has the
option of bringing a cause of action in both
tort and contract.
 Midland Bank Trust Co. Ltd. v Hett, Stubbs and
Kemp [1978] 3 All ER 571
• W owned a farm which he let to his son G. In 1961 W agreed to give G an option to purchase the
freehold reversion of the farm at a stated price at any time during the next 10 years. W and G
went together to the firm of solicitors who had acted for them both for many years and there saw
A, the senior partner, who drew up a formal agreement dated 24 March 1961 embodying the
terms of the option which W signed. A kept the option in custody for G and opened a file on it but
failed to register it as an estate contract under the Land Charges Act 1925. In June 1967 G
consulted the solicitors about the possibility of exercising the option and the solicitors instructed
counsel to advise when G should exercise it. However no check was made to see whether the
option had been registered. On 17 August 1967 W conveyed the farm to his wife. In October 1967
G attempted to exercise the option and found out for the first time that the option had never
been registered and that the farm had in the meantime been sold. After bringing an action which
later proved unsuccessful against W's wife for specific performance, G issued a writ on 21 July
1972 against the solicitors for damages for breach of their professional duties. Before the action G
died and the plaintiffs took over the action as his executors. The solicitors contended, inter alia,
that their failure to register the option within a reasonable time of 24 March 1961 was a breach of
contract only and any action against them in respect of events occurring prior to the
commencement of the limitation period on 21 July 1966 was barred by the Limitation Act 1939. It
was contended by the plaintiffs (1) that the solicitors were employed on a general retainer by G
and therefore, when they were consulted by G in June 1967, they were under a duty to consider
whether the option had been registered, (2) that the solicitors were liable in tort and the cause of
action in tort was not complete until the damage was sustained in August 1967, ie within the
limitation period, and (3) that, if the solicitors were liable only in contract, nevertheless their
breach of contract was the non-performance of their obligation to register the option before the
third party acquired an interest in the land in August 1967, ie within the limitation period.
• Held - (i) The solicitors were not liable under a general retainer since the
extent of a solicitor's duties to his client depended on the terms and
limits of his retainer. There was no such thing as a 'general retainer' of a
solicitor in the sense of a solicitor being under a duty to consider all
aspects of his client's interests generally when consulted by the client
about a particular aspect of a problem. (ii) The solicitors were however
liable to the plaintiffs in tort because under the general law the
relationship of solicitor and client gave rise to a duty on a solicitor to
exercise that care and skill on which he knew that his client would rely,
and to a duty not to injure his client by failing to do that which he had
undertaken to do and which, at the solicitor's invitation, the client had
relied on him to do. Furthermore, there was no rule of law which
confined a solicitor's duty to his client under his retainer to a contractual
duty alone; nor was there any rule of law which precluded a claim in tort
for breach of a duty to use reasonable care and skill if there was a parallel
contractual duty of care.
• Midland Bank was a first instance decision.
However, the reasoning was approved by Lord
Goff in the House of Lords giving the principal
decision in Henderson v Merrett Syndicates
[1994] 3 All ER 506.
• All these cases concerned negligence in the
course of performing a contractual duty of care,
but if tortious and contractual obligations can
coexist after the contract is concluded, it would
seem that they can also coexist before the
contract is concluded.
– Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5
• In 1961 the plaintiffs, a large oil company , built a site for a filling
station as an outlet for their petrol sales on a busy main street.
Early in 1963, the plaintiffs interviewed the defendant, a
prospective tenant, and an experienced servant of the plaintiffs
estimated that potential throughput was 200,000 gallons. The
defendant suggested that 100,000 to 150,000 was more likely, but
his doubts were quelled by his trust in the greater experience and
expertise of the plaintiffs' servants; and as such he entered into a
tenancy agreement with the plaintiffs. Despite his best
endeavours the throughput in the first 15 months was only 78,000
gallons. He starting making losses, and when he could not pay
cash for the petrol supplied the plaintiffs cut off his supplies. In
December 1966 they issued a writ claiming possession of the
premises, moneys owed, and profits. The defendant gave up
possession in March 1967; and counterclaimed for negligent
misrepresentation.
• Held, allowing the appeal and dismissing the cross-appeal, (1) that
the statement as to potential throughput was a contractual
warranty for it was a factual statement on a crucial matter made
by a party who had, or professed to have, special knowledge and
skill with the intention of inducing the other party to enter into the
contract of tenancy; that it did induce the defendant to enter into
the contract and therefore the plaintiffs were in breach of the
warranty and liable in damages for the breach.
• (2) That the statement was a negligent representation made by a
party holding himself out as having special expertise in
circumstances which gave rise to the duty to take reasonable care
to see that the representation was correct; that that duty of care
existed during the pre-contractual negotiations and survived the
making of the written contract which was the outcome of the
negotiations; and that therefore the plaintiffs were also liable for
damages for the tort of negligence.
 The decision of the Court in Esso Petroleum v
Mardon does not necessarily suggest that
parties in pre-contractual negotiations
always owe each other a duty of care.
 However, it establishes that once all the
ingredients of a duty of care are present, the
duty is not excluded by the fact that the
parties are in a pre-contractual situation.
 A party who has suffered a misrepresentation
and who is unable or unwilling to prove fraud
may seek his remedy:
 At common law, or
 In equity.
• Damages
– The claim is in tort and so the tortious rules apply.
• The object in tort is to restore the injured party to the
position he occupied before the tort was committed.
– Since the action is in negligence, any problems of
remoteness are to be resolved by applying the
foreseeability test.
• That is, foreseeability at the moment of the breach of duty.
• In Esso Petroleum v Mardon, the Court of Appeal applied the
same test to damages for breach of warranty and for
negligence but this was because the warranty was that the
forecast was carefully made and not that it was correct.
– South Australia Asset Management Corpn v York
Montague Ltd [1996] 3 All ER 365
• A valuer was under a duty to take reasonable care to provide
information on which a lender would decide on a course of
action, and where he had negligently overvalued property on
which the lender had secured a mortgage advance, he was
not responsible for all the consequences of that course of
action; he was responsible only for the foreseeable
consequences of the information being wrong. A duty of care
which imposed upon the informant responsibility for losses
which would have occurred even if the information given had
been correct was not fair and reasonable as between the
parties and was therefore inappropriate as an implied term of
a contract or a tortious duty arising from the relationship
between them.
• The party misled may disaffirm the contract either by
notifying the other party to that effect, or by bringing
an action (or counterclaim) for rescission.
• The effect of rescission is to nullify the contract ab initio. An
essential requirement of this remedy, where the contract has been
partly or wholly performed, is therefore restitutio in integrum
(restoration of the parties to their original positions).
• Accordingly, in either case the party misled must be
prepared to restore any money or property which has
been transferred to him under the contract.
• Similarly, the party misled can claim the recovery of
property transferred to the other party.
• Where, under the contract, the party misled
has assumed burdens which otherwise would
have been the responsibility of the other
party, these must also be taken back.
• In other words, the party who made the
misrepresentation must indemnify the other
party for obligations assumed as a direct
result of the contract.
– Whittington v Seale-Hayne (1900) 82 LT 49
• Plaintiffs, who were the lessees of certain premises which they used for the
purpose of breeding prize poultry, alleged that they had been induced to take the
lease on the representations of defendant's agents that the premises were in a
sanitary condition and that the state of repair of the premises was good. The
lease included a covenant under which the tenant was obliged to effect certain
repairs in line with local authority requirements. The premises proved to be in an
insanitary condition and in a bad state of repair. The plaintiffs claimed an
indemnity from the lessors under the following heads: (i) value of stock lost, (ii)
loss of profits, (iii) loss of breeding season, (iv) rent and removal of stores, (v)
medical expenses, (vi) rates and (vii) cost of repairs ordered by the local
authority.
• Held: The plaintiffs could not claim to be indemnified by way of compensation for
injuries sustained by the insanitary condition of the premises and occasioned by
their entering into the contract. Such compensation is in reality damages pure
and simple, and is not the proper consequence of rescinding the contract.
Accordingly, indemnity was payable for heads (vi) and (vii) only. No indemnity
was payable for heads (i) to (v) because these losses were not related to
obligations created directly by the contract.
• Where a contract is disaffirmed by giving notice that
further performance is refused, the misrepresentation
may be raised as a defence to any action for specific
performance which the other party may bring.
• Rescission is available to a party misled by a
misrepresentation without alleging fraud
notwithstanding that the misrepresentation has
become a term of the contract.
– Section 1 of the Misrepresentation Act, 1967 preserves the
right of rescission in cases where the false statement was
made first as a mere representation but subsequently
became a term of the contract.
• The common law rule that damages are not awarded in
contract law for misrepresentation that is not fraudulent
has been amended by the Misrepresentation Act, 1967.
• Section 2(1) of the Act provides that where a person has
entered a contract after a misrepresentation has been
made to him by another party and has thereby suffered
loss, then, if the person making the misrepresentation
would be liable in damages if the misrepresentation had
been fraudulent, he is nevertheless liable in damages
unless he proves that he had reasonable ground to believe
and did believe up to the time the contract was made that
the facts represented were true.
• Section 2(2) provides that where a person has entered a contract
after a misrepresentation has been made to him otherwise than
fraudulently, giving him the right to rescind, then, if it is claimed in
any proceedings arising out of the contract, that the contract has
been rescinded, the Court may declare the contract subsisting and
award damages in lieu of rescission if it would be equitable to do
so.
– The court must have regard to the nature of the misrepresentation,
the loss that would be caused if the contract were upheld, and the loss
that rescission would cause to the other party.
• Section 2(3) relates s 2(1) and s 2(2) by providing that damages
may be awarded under s 2(2) whether or not there is liability under
s 2(1). But any award under s 2(2) must be taken into account
in assessing liability under s 2(1).
• It is to be noted that in an action under the
Misrepresentation Act, 1967, the representor has to bear
the burden of disproving his negligence.
• However, a claimant may still prefer to formulate a claim
at common law for fraud or negligence because:
– A claimant who relies upon the doctrine in Hedley Byrne & Co
Ltd v Heller & Partners Ltd does not have to establish
misrepresentation in the strictest sense.
– Different rules as to remoteness and measure of damages apply
to each forms of action.
– The statutory action only applies ‘where a person has entered
into a contract’. Accordingly, where it is held that the contract is
void ab initio, there may be no action under the statute.
 The complexities of the interrelationships
between the rules are illustrated by Howard
Marine and Dredging Co Ltd v A Ogden & Sons
(Excavations) Ltd [1978] 2 All ER 1134.
• Innocent misrepresentation is restricted to
misrepresentations that are made without
fault. An innocent misrepresentation is only
of legal significance when connected with a
contract.
• Representations made with an honest belief
in its truth, and where there was no duty of
care or where it was not breached.
– The test of honesty is subjective.
• The effect of misrepresentation is to make the
contract voidable and not void.
– This means it is valid unless and until it is set aside by
the representee.
– On discovering the misrepresentation the representee
may elect to affirm or to rescind the contract.
• A contract is affirmed by representee declaring his intention to
proceed with the contract, or does some act from which this
may be reasonably inferred.
• A contract is rescinded if the representee makes it clear that
he refuses to be bound by its provisions. The effect is that the
contract is terminated ab initio.
• Once an election (whether to affirm or to
rescind) has been unequivocally made, it is
determined forever. It cannot be revived.
– Clough v London and North Western Rly Co (1871)
LR 7 Exch 26
• If the representee elects to rescind the
contract, the general rule is that within a
reasonable time he must communicate his
decision to the representor.
 It follows, therefore, that the right to rescind
is lost:
 If the representee has affirmed the contract,
 In certain circumstances by lapse of time,
 If restitutio in integrum is no longer possible, or
 If rescission would deprive a third party of a right
he has acquired in the subject matter of the
contract in good faith and for value.
• A representee has affirmed the contract where
with full knowledge of the facts and of the
representation, he either declares his intention
to proceed with the contract or does some act
from which such an intention may reasonably be
inferred.
– Clough v London & North Western Rly Co
– Car & Universal Finance Co Ltd v Caldwell [1964] 1 All
ER 290
– Re Hop & Malt Exchange & Warehouse Co, ex p Briggs
(1866) LR 1 Eq 483
• Lapse of time without any step towards repudiation being
taken does not in itself constitute affirmation, but it may
be treated as evidence of affirmation.
– In Clough it was said that when the lapse of time is great ‘it
probably would in practice be treated as conclusive evidence’ of
an election to recognize the contract.
• In Leaf v International Galleries it was held that a contract
for sale of goods could not be rescinded on the basis of a
non-fraudulent misrepresentation when five years had
elapsed between the sale and discovery of the truth. It was
said that ‘it behoves the purchaser to either verify or, as
the case may be, to disprove the representation within a
reasonable time, or else stand or fall by it’.
• Upon rescission the representee is entitled to
recovery of anything that he may have paid or
delivered under the contract. He must also make
a similar restoration of anything obtained by him
under the contract.
• Therefore, rescission cannot be enforced if
events which have occurred since the contract
and in which the representee has participated
make it impossible to restore the parties
substantially to their original position.
• Therefore if a partnership in which the representee
was induced to take shares is converted into a limited
liability company, rescission is excluded since the
existing shares are completely different in nature and
status from those originally received – Clark v Dickson
(1858) EB & E 148
• Rescission is also impossible if the subject matter of
the contract is a mine that has been worked out
(Vigers v Pike (1842) 8 Cl & Fin 562) or operated for a
substantial time (Attwood v Small (1838) 6 Cl & Fin
232) or goods that have been consumed or altered by
the buyer (Clark v Dickson).
 The rule is not enforced to the letter,
however, if the result would be unfair. For
example, if the property has deteriorated so
that it cannot be restored in its original state,
provided that its substantial identity remains,
its restoration will be ordered on the terms
that the claimant pay compensation for its
deterioration.
• If before the representee elects to either affirm
or disaffirm the contract, an innocent third party
acquires for value an interest in the subject
matter of the contract, the right to rescission is
defeated.
• If the contract is held to be void for mistake, no
title passes to the fraudulent misrepresentor and
as such no title passes to the innocent third
party. However, if the contract is voidable only,
the title is valid until it has been avoided,
provided this is done before an innocent third
party acquires the property.
• White v Garden (1851) 10 CB 919
– Parker bought fifty tons of iron from Garden by persuading him
to take in payment a bill of exchange which had apparently
been accepted by one Thomas of Rochester. Parker resold the
iron to White, who acted in good faith, and Garden made
delivery in one of his barges at White’s wharf. Garden upon
discovering that the bill of exchange was worthless since there
was no such person as Thomas of Rochester, seized and
removed part of the iron that was still in the barge.
– Held: Title passed to Parker under a contract that was
temporarily valid and, while still undisturbed, had been passed
to an innocent purchaser. It was not a case of operative mistake
since Garden intended to contract with Parker.
• A person who is induced to become a
shareholder by reason of a false representation
is entitled to rescind the contract as against the
company. However, this right is lost if it will
prejudice the creditors of the company.
• The commencement of winding up proceedings,
therefore, bars the right of a shareholder to
avoid the contract under which he obtained his
shares – Oakes v Turquand and Harding (1867) LR
2 HL 325
• Section 1 of the Misrepresentation Act 1967:
Where a person has entered into a contract after a
misrepresentation has been made to him, and-
(a) the misrepresentation has become a term of the
contract; or
(b) the contract has been performed;
or both, then, if otherwise he would be entitled to
rescind the contract without alleging fraud, he shall
be so entitled, subject to the provisions of this Act,
notwithstanding the matters mentioned in
paragraphs (a) and (b) of this section.
• Recall that unless the misrepresentation was
made by a contracting party or his agent,
many of the remedies would not be available
because there would be no contract between
the representor and the representee.
• If the representation was fraudulent then the
representor may be sued in tort for deceit,
and an action may lie for negligence only in
instances that fall under the principle in
Hedley Byrne.
• In some cases assistance may be obtained from
the doctrine of estoppel by representation. This
was stated by Lord Macnaghten in Balkis
Consolidated Co v Tomkinson [1893] AC 396 at
410 as follows:
– “It is…a principle of universal application, that if a
person makes a false representation to another and
that other acts upon that false representation the
person who has made it shall not afterwards be
allowed to set up that what he said was false and to
assert the real truth in place of the falsehood which
has so misled the other.”
• The main obstacle to a wide use of this principle is
that it is said that estoppel is not in itself a cause of
action.
• If this view is correct, it follows therefore that the
claimant who wishes to employ the principle of
estoppel must formulate some independent cause of
action which would have succeeded had the estoppel
statement been true. He may then rely on estoppel to
defeat a defence which would otherwise be available
to the defendant, since evidence to prove the untruth
of the statement will be inadmissible.
– Burrows v Lock (1805) 10 Ves 470