2. MISREPRESENTATION REMEDIES
1. RECISSION
Recission is an equitable remedy. It involves setting the contract aside and is available regardless of the type of
misrepresentation that has occurred. Rescinded contracts are terminated ab initio: in other words, from the very start.
It follows that the object of rescission is to put the contracting parties into the position that they would have been in if
the contract had never existed at all. However, there are limitations on its availability:
1.1 BARS TO RESCISSION: AFFIRMATION
Rescission will not be available if the claimant has affirmed the contract either by expressly stating that they intend to
continue with it or by acting in such a way that the intention to continue with the contract can be implied from their
conduct. Affirmation must be done with the full knowledge of the representation and the right to rescind the contract
Long v Lloyd (1958)
Facts The plaintiff bought a lorry from the defendant following alleged misrepresentations by the defendant as to
the quality of the vehicle. When defects were first discovered the parties agreed to share the cost of repairs
and continue with the contract. Following a subsequent breakdown of the lorry, and without a remedy in
damages, the plaintiff sought to rescind the contract.
Issue Whether the agreement to share the cost of repairs constitute an affirmation of the contract, therefore
barring rescission.
Held His previous decision to continue constituted an affirmation which deprived him of the right subsequently
to rescind.
1.2 BARS TO RESCISSION: LAPSE OF TIME?
At one time it’s as the law that rescission could be lost simply by lapse of a reasonable time from when the contract
was made (Leaf v International Galleries) But this case is Ono longer considered good law in England most likely
Hong Kong as well (Salt v Stratstone Specialist) and lapse of time will no longer by itself bar rescission unless it
would lead to an inequitable outcome.
Salt v Stratstone Specialist (2015)
Facts Stratstone sold a ‘brand new’ car to Salt who later discovered major and minor defects. Stratstone repaired
some of the defects, but by September 2009 Salt tried to reject the car and recover his money. Stratstone
refused to refund him and Salt commenced proceedings before a District Judge asserting the car was not of
merchantable quality and seeking damages. During proceedings, Salt found out that the car was not new
and amended his claim to include misrepresentation and rescission. The District Judge awarded damages of
$3,250 but declined to order rescission because restitutio in integrum was impossible. After an appeal, a
circuit Judge allowed rescission on the basis it was possible to effect restitutio in integrum, and the delay
was not long enough to bar rescission. Stratstone appealed.
Issue Whether the delay barred rescission given that the delay was due to the discovery of the truth being late.
Held Appeal dismissed.
Reason 35. In all the circumstances, it does not seem to me that lapse of time on its own can be a bar to rescission
in this case. As the district Judge pointed out, the ground on which rescission became available only became
known to Mr Salt on disclosure of documents. Most of the subsequent delay has been due to the litigation
process and Stratstone wrongful refusal to take the car back and return the price.
1.3 BARS TO RESCISSION: RIGHTS OF THIRD PARTIES
If goods are obtained by misrepresentation and sold in good faith to a third party, the contract cannot then be rescinded
to allow the party to whom the misrepresentation was made to recover the goods from the third party.
Lewis v Avery (1971)
Facts A rogue pretended to be Richard Green, the then well-known actor, and signed a cheque in the name of
“R.A. Green” In order to purchase a car. Lewis asked if he had anything to prove his identity and he produced
Chloe T 7
, an admission pass to Pinewood Studios, bearing an official stamp, the name of “Richard A Green” and a
photograph of the man. The man was not Richard Greene and the cheque was dishonoured. The rogue then
sold the car to a bona fide purchaser, Averay.
Held The mistake was not operative so as to make the contract with the rogue void and that Averay had,
therefore, acquired good title to the car. The rogue had obtained title to the car, albeit one which was
“voidable”, and the plaintiff could not rescind the contract with the rogue since an innocent third party had
acquired interest.
Reason Lord Denning MR: “There is a contract made with the very person there, who is present in person. It is liable
no doubt to be avoided for fraud, but it is still a good contract under which title will pass unless and until it
is avoided.”
1.4 BARS TO RECISSION: RESTITUTIO IN INTEGRUM IMPOSSIBLE
Rescission will also be barred where a substantial restoration of the status quo ante contract (or restitutio in integrum)
is impossible. One cannot unscramble eggs. (See Thomas Witter)
It is sufficient if P can be put substantially in pre-contract position, it doesn’t have to be exact and the court can make a
cash adjustment to ensure ‘tactical justice’
2. TYPE OF MISREPRESENTATION AND REMEDIES
2.1 FRAUDULENT MISREPRESENTATION
This is established when a person makes a false statement which he knows is not true and has no belief in its truth, or
which he makes recklessly, not caring whether it is true or not.
Derry v Peek (1889)
Facts In the prospectus released by the defendant company, it was stated that the company was permitted to use
trams that were powered by steam, rather than by horses. In reality, the company did not possess such a
right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the Board
was considered a formality in such circumstances and the claim was put forward in the prospectus with this
information in mind. However, the claim of the company for this right was later refused by the Board. The
individuals who had purchased a stake in the business, upon reliance on the statement, brought a claim for
deceit against the defendant’s business after it became liquidated.
Issue It is important to note that the law regarding false misrepresentation was still developing and this was an
important case in doing so. In this case, the court was required to assess the statement made by the
defendant company in its prospectus to see whether the statement was fraudulent or simply incorrect.
Held The claim of the shareholders was rejected by the House of Lords. The court held that it was not proven by
the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent
misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the
truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit.
Reason Lord Herschell considered the meaning of ‘fraudulent’ as follows: “… fraud is proved when it is shown that
a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) 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.”
Subject to this, the plaintiff can recover all the loss which flows from the fraudulent misrepresentation, even if the loss is
not foreseeable.
Doyle v Olby (Ironmongers) Ltd (1969)
Facts The plaintiff bought a business for $4,500 after representations by the defendants regarding the profits.
Those representations, however, were fraudulent as the business’s profit was significantly lower. In an
action against the defendants for fraudulent misrepresentation, the judge awarded the plaintiff $1500,
which the plaintiff appeals on the grounds that the award was far too little. (The judge awarded damages
based on breach of contract)
Chloe T 8
1. RECISSION
Recission is an equitable remedy. It involves setting the contract aside and is available regardless of the type of
misrepresentation that has occurred. Rescinded contracts are terminated ab initio: in other words, from the very start.
It follows that the object of rescission is to put the contracting parties into the position that they would have been in if
the contract had never existed at all. However, there are limitations on its availability:
1.1 BARS TO RESCISSION: AFFIRMATION
Rescission will not be available if the claimant has affirmed the contract either by expressly stating that they intend to
continue with it or by acting in such a way that the intention to continue with the contract can be implied from their
conduct. Affirmation must be done with the full knowledge of the representation and the right to rescind the contract
Long v Lloyd (1958)
Facts The plaintiff bought a lorry from the defendant following alleged misrepresentations by the defendant as to
the quality of the vehicle. When defects were first discovered the parties agreed to share the cost of repairs
and continue with the contract. Following a subsequent breakdown of the lorry, and without a remedy in
damages, the plaintiff sought to rescind the contract.
Issue Whether the agreement to share the cost of repairs constitute an affirmation of the contract, therefore
barring rescission.
Held His previous decision to continue constituted an affirmation which deprived him of the right subsequently
to rescind.
1.2 BARS TO RESCISSION: LAPSE OF TIME?
At one time it’s as the law that rescission could be lost simply by lapse of a reasonable time from when the contract
was made (Leaf v International Galleries) But this case is Ono longer considered good law in England most likely
Hong Kong as well (Salt v Stratstone Specialist) and lapse of time will no longer by itself bar rescission unless it
would lead to an inequitable outcome.
Salt v Stratstone Specialist (2015)
Facts Stratstone sold a ‘brand new’ car to Salt who later discovered major and minor defects. Stratstone repaired
some of the defects, but by September 2009 Salt tried to reject the car and recover his money. Stratstone
refused to refund him and Salt commenced proceedings before a District Judge asserting the car was not of
merchantable quality and seeking damages. During proceedings, Salt found out that the car was not new
and amended his claim to include misrepresentation and rescission. The District Judge awarded damages of
$3,250 but declined to order rescission because restitutio in integrum was impossible. After an appeal, a
circuit Judge allowed rescission on the basis it was possible to effect restitutio in integrum, and the delay
was not long enough to bar rescission. Stratstone appealed.
Issue Whether the delay barred rescission given that the delay was due to the discovery of the truth being late.
Held Appeal dismissed.
Reason 35. In all the circumstances, it does not seem to me that lapse of time on its own can be a bar to rescission
in this case. As the district Judge pointed out, the ground on which rescission became available only became
known to Mr Salt on disclosure of documents. Most of the subsequent delay has been due to the litigation
process and Stratstone wrongful refusal to take the car back and return the price.
1.3 BARS TO RESCISSION: RIGHTS OF THIRD PARTIES
If goods are obtained by misrepresentation and sold in good faith to a third party, the contract cannot then be rescinded
to allow the party to whom the misrepresentation was made to recover the goods from the third party.
Lewis v Avery (1971)
Facts A rogue pretended to be Richard Green, the then well-known actor, and signed a cheque in the name of
“R.A. Green” In order to purchase a car. Lewis asked if he had anything to prove his identity and he produced
Chloe T 7
, an admission pass to Pinewood Studios, bearing an official stamp, the name of “Richard A Green” and a
photograph of the man. The man was not Richard Greene and the cheque was dishonoured. The rogue then
sold the car to a bona fide purchaser, Averay.
Held The mistake was not operative so as to make the contract with the rogue void and that Averay had,
therefore, acquired good title to the car. The rogue had obtained title to the car, albeit one which was
“voidable”, and the plaintiff could not rescind the contract with the rogue since an innocent third party had
acquired interest.
Reason Lord Denning MR: “There is a contract made with the very person there, who is present in person. It is liable
no doubt to be avoided for fraud, but it is still a good contract under which title will pass unless and until it
is avoided.”
1.4 BARS TO RECISSION: RESTITUTIO IN INTEGRUM IMPOSSIBLE
Rescission will also be barred where a substantial restoration of the status quo ante contract (or restitutio in integrum)
is impossible. One cannot unscramble eggs. (See Thomas Witter)
It is sufficient if P can be put substantially in pre-contract position, it doesn’t have to be exact and the court can make a
cash adjustment to ensure ‘tactical justice’
2. TYPE OF MISREPRESENTATION AND REMEDIES
2.1 FRAUDULENT MISREPRESENTATION
This is established when a person makes a false statement which he knows is not true and has no belief in its truth, or
which he makes recklessly, not caring whether it is true or not.
Derry v Peek (1889)
Facts In the prospectus released by the defendant company, it was stated that the company was permitted to use
trams that were powered by steam, rather than by horses. In reality, the company did not possess such a
right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the Board
was considered a formality in such circumstances and the claim was put forward in the prospectus with this
information in mind. However, the claim of the company for this right was later refused by the Board. The
individuals who had purchased a stake in the business, upon reliance on the statement, brought a claim for
deceit against the defendant’s business after it became liquidated.
Issue It is important to note that the law regarding false misrepresentation was still developing and this was an
important case in doing so. In this case, the court was required to assess the statement made by the
defendant company in its prospectus to see whether the statement was fraudulent or simply incorrect.
Held The claim of the shareholders was rejected by the House of Lords. The court held that it was not proven by
the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent
misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the
truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit.
Reason Lord Herschell considered the meaning of ‘fraudulent’ as follows: “… fraud is proved when it is shown that
a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) 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.”
Subject to this, the plaintiff can recover all the loss which flows from the fraudulent misrepresentation, even if the loss is
not foreseeable.
Doyle v Olby (Ironmongers) Ltd (1969)
Facts The plaintiff bought a business for $4,500 after representations by the defendants regarding the profits.
Those representations, however, were fraudulent as the business’s profit was significantly lower. In an
action against the defendants for fraudulent misrepresentation, the judge awarded the plaintiff $1500,
which the plaintiff appeals on the grounds that the award was far too little. (The judge awarded damages
based on breach of contract)
Chloe T 8
