Representations under English Law - New issues to bear in mind
Analysis of judicial precedent:
Salt v Stratstone Specialist Limited T/A Stratstone Cadillac Newcastle [2015] EWCA Civ 745
October, 14
Breach of representations as a basis for rescission in terms of English law: new (additional) basis for
rescission
As we have previously reported, the concept of representations has now appeared in Russian law but it is
believed that structuring of deals under English law has a number of advantages, including a solid judicial
practice in relation to practically every issue important for business.
However, English legal concepts are also evolving. This relates, inter alia, to the concept of creation of right to
rescind a contract in case of providing misrepresentations to another party.
The recent precedent additionally clarifies this issue allowing us to understand general approach of courts with
respect to making decisions on rescission or rejecting of such rescission in case of misrepresentation.
Although a subject-matter of the dispute is not connected with shares or securities, we believe that this
precedent will also have an impact on asset transactions, equity and securities transactions.
Below is an analysis of ratio of the case prepared in association with our English colleagues from DWF LLP.
EXISTING JUDICIAL APPROACH TO MISREPRESENTATION
If during a conclusion of an agreement one of the parties relies upon representation made by another party
which afterwards turns out to be a misrepresentation, i.e. if first party is provided with misrepresentations by
another party, then remedies available to the first party depend on the type of misrepresentation:



Negligent,
innocent and
fraudulent.
As a general rule, in all three cases an innocent party can claim rescission which implies mandatory restitution,
i.e. restoration of parties to such positions as if a contract had never been concluded. If misrepresentation was
negligent or fraudulent the innocent part has a right to seek damages in lieu or in addition to rescission.
At the same time damages’ claim is not available if the misrepresentation was innocent, however the court
can in its sole discretion (regardless of plaintiff's rescission claims) award damages in lieu of rescission.1 On the
basis of current courts’ practice it may be argued that the court will refuse to grant rescission when restitution
is not possible.
Among bars to rescission courts have mentioned:
- considerable lapse of time between date of conclusion of an agreement and seeking rescission2, аs well as
- potential detrimental change of defendant’s position after rescission (for example, if subject of a contract has
lost part of its value).
1
2
s.2(2) of the Misrepresentation Act 1967
Leaf v International Galleries [1950] 2 KB 86
As part of this analysis we will determine how the court have changed its attitude to bars to rescission and will
draw a general conclusion on impact of judicial discretion within the framework of each particular case.
CIRCUMSTANCES OF THE CASE AND PROCEDURAL HISTORY (state courts of England)
In September 2007 the claimant (individual) bought a luxury sport car. Before he purchased the vehicle the
respondent (legal entity) verbally informed him that it was “brand new”. In fact, whilst the vehicle had never
been registered, it was two years old and had been in a number of accidents.
Following his purchase, the claimant discovered that the vehicle had a sufficient amount of defects which
emerged over a period of time. The defendant repaired some of these defects, but in September 2008 he
decided to return the vehicle to the respondent and obtain a full refund. The defendant refused and the
claimant proceeded to issue legal proceedings claiming damages.
As a result of disclosure of documentation leading up to trial, the claimant discovered that the vehicle was not
new, and he therefore amended his pleadings to include misrepresentation and sought to claim rescission.
The court of first instance (District Judge, County Court) dismissed the claim for rescission and ordered
damages. By making such decision it was, inter alia, guided by the following:
1. The vehicle had been registered to the claimant, which, according to the judge, had made its return
impossible since a registered car was fundamentally different from an unregistered car which the
claimant had bought;
2. There had been a considerable lapse of time between purchase of the car and attempt at its return;
3. A car is an asset prone to depreciation and its usage throughout two years had made it less valuable.
It is also worth mentioning that County Court’s decision raised a question, which has never been raised before
the courts until Salt v Stratstone3: whether the court can grant damages for innocent misrepresentation when
rescission is not available. County Court stated that it can and granted damages.
The claimant appealed against this decision. The Circuit Judge (High Court) reversed the initial decision and
found that rescission was possible and stated that if the rescission is not possible the damages cannot be
granted. The defendant appealed the decision to the Court of Appeal.
THE COURT OF APPEAL DECISION, PRACTICAL JUSTICE
The Court of Appeal confirmed the decision of the Circuit Court on rescission and ordered that the court
should allow rescission if 'practical justice' can be done. In the context of this precedent it means that
registration, time lapse and depreciation of a car could not be a basis for saying that rescission was impossible
as the car could be returned and compensation for depreciation could be made.
Moreover, the court specially indicated that in terms of practical justice it is possible that the defendant had a
right for a certain compensation in connection with return of a car in a more worn-out state, however this is
for the defendant to prove.
The Court paid special attention to (i) the state registration, (ii) lapse of time between date of contract and the
date of a rescission claim and (iii) detrimental change in the defendant’s position (in case of rescission) as
reasons for the Court’s refusal with respect to the rescission, and ordered that neither event is, as such, a
reason for saying that rescission was not possible. Brief description of key aspects of the court’s reasoning
during decision-making is given below.
3
http://www.bailii.org/ew/cases/EWCA/Civ/2015/745.html
Besides as it was previously mentioned Salt v Stratstone became the first decision of the Court of Appeal as to
whether damages for the innocent misrepresentation are available even though recession is not. The Court of
Appeal decided that in respect of the innocent misrepresentation the court cannot grant damages if
rescission is not available. It stated: “the words “in lieu of rescission” must, in my view, carry with them the
implication that rescission is available (or was available at the time the contract was rescinded). If it is not (or
was not available in law) because e.g. the contract has been affirmed, third party rights have intervened, an
excessive time has elapsed or restitution has become impossible, rescission is not available and damages
cannot be said to be awarded “in lieu of rescission”.” Being a judgment of the Court of Appeal, the decision is
binding on the Court of Appeal and inferior courts (ie the High Court and County Court).
TIME LAPSE AS A BAR FOR RESCISSION
The Court had analyzed the case of Leaf v International Galleries [1950] 2 KB 86 – a leading precedent on the
basis of which a time lapse could be a considerable ground for refusal to grant rescission. According to that
case, the court had dismissed the claim for rescission of a contract for purchase of a painting on the grounds
that, among other matters, there was a considerable lapse of time between date of purchase of the painting
and date of filing of lawsuit.
The court had come to the decision that probably the mentioned precedent could not be considered to be
good law as it is based on outdated legislation. Judging from provisions of the common law and current English
legislation4, lapse of time on its own cannot be a bar to rescission, as it should be unreasonable to be
considered as such. Unreasonable lapse of time is such lapse of time after which, as judge Roth had noted, it
would be “inequitable” to rescind a contract.
In terms of this precedent, it is necessary to take into account the fact that the claimant was able to review
documents saying that the car was not brand new only during disclosure of documentation leading up to trial,
and further impossibility of returning the car is a consequence of defendant’s misconduct. Thus, the claimant
was objectively unable to check the age of the car before commencement of legal proceedings and, therefore,
a term during which he had used the car could not be taken into consideration during making decisions on
possibility to rescind the contract.
POTENTIAL DETRIMENTAL CHANGE OF DEFENDANT’S POSITION AS A BAR FOR RESCISSION
In the District Judge’s view, the car, being an asset prone to depreciation, could not be returned to the
defendant as a result of rescission because it would lead to detrimental change of defendant’s position in
comparison to position in which he had been at the time of conclusion of the agreement.
The Court of Appeal has not agreed with such reasoning and noted that detrimental change of defendant’s
position could not be a bar for rescission if the defendant could be compensated in connection with such
detrimental change. At that, as was mentioned earlier, it was for the defendant to prove such detrimental
change.
CONCLUSION
Thus, during analysis of prospects of misrepresentation case we should take into account that courts will
probably resort to “practical justice” when making a decision on rescission of a contract or refusal with
respect to such rescission. The court’s decision will depend much on circumstances of the case, but even now
it is clear that courts tend to take a more flexible approach and will try to reach the fairest outcome of legal
proceedings.
4
Sale of Goods Act 1979, Misrepresentation Act 1967
Besides, as it was previously mentioned, whilst the subject-matter of the dispute is not connected with shares
or securities, this case may have an impact on asset transactions, equity and securities transactions. Indeed,
there are already various cases which deal with situations where (for example) a shareholder's right to claim
rescission of a contract to take shares may be lost or retained, and Salt v Stratstone may now assist with such
arguments. By way of example, in Salt v Stratstone, the Defendant argued that restitution in full was no longer
possible since the vehicle had been registered to the Claimant. The Court of Appeal held that “registration is a
legal concept which does not change the physical entity that a car is”. This situation is arguably analogous to
updating a Register of Members once shares have been issued or transferred; that is, registration of shares
may not necessarily affect the ability to return them. It will be interesting to see how Salt v Stratstone is
deployed in such disputes.
The case also highlights the importance of framing your case properly and considering what remedies are
available for each type of claim. For example, claims for misrepresentation can sometimes be framed as a
claim for breach of contract, which give rise to a different remedy. Alternatively, consideration should be given
as to whether a claim can be brought for fraudulent misrepresentation (in respect of which damages and
rescission are available). It is therefore imperative that claims are properly pleaded and that parties undertake
an early analysis of what remedies are available for different causes of action because this may avoid
arguments such as those encountered in Salt v Stratstone.
We shall keep you up to date with the latest news.
Oleg Bychkov
Partner,
Capital markets
Oleg.Bychkov@lp.ru