Privity and Third Party Rights- The effect of a contract to third parties (people not party to a contract)- Common law is still Hong Kong’s position in privity

Privity Doctrine

First limb of the rule – those not party to the contract cannot acquire rights under a contract to which they are not a party

- If A and B contracts to confer a benefit on C, C doesn’t have an action if B fails to confer that benefit on him

- Beneficial for complexly linked contractso EG: building contracts contractors enter into many subcontracts. If an employee of one of the

subcontractors gets injured, protects the main contractors as the employee cannot claim against them.

- Jus Quaesitum Tertio a doctrine based on Roman law that a contract can be made in favouring a third party

Tweddle v Atkinson- Groom’s father agreed with bride’s father to pay the groom money in consideration of marrying his

daughter – did not pay – son sued- Held that the son cannot bring an action because he did not provide consideration – consideration must

move from the party entitled to sue in contract – no legal entitlement conferred on third parties to an agreement

Dunlop Pneumantic Tyre Co v Selfridge- Dunlop made tires and specified to its purchasers not to sell below an MSRP – Dew sold it to Selfridge

and Selfridge sold below the MSRP – Dunlop sued Selfridge- Doctrine of privity requires only a party to a contract can sue – doctrine of agency requires that the

principal not named in the contract can only be sued if the promisee was contracted as an agent – doctrine of consideration requires that a person who has given consideration in contract can sue

Second limb of the rule – those not party to the contract cannot be subject to a burden by a contract which they are not a party

- A and B cannot contract to oblige C to do something – generally accepted and not disputed - But there are situations which may impose obligations on third parties – an obligation to third parties not

to induce a party to a contract to break the contract – a breach of this obligation is a tort where the defendant knows causes a party to breach a contract and cause loss to the other party

Limb 2 – Breach of obligations

Lumley v Gye- Held that one may claim damages from a third person who interferes in the performance of a contract by

another – parties contracted to sing at a concert but was induced by a third party to break the contract in favour or higher pay and singing elsewhere

OBG v Allan- In a tort of inducing or procuring the breach of contract, there are five requirements

o There must be a contracto The contract must be breachedo The defendant’s conduct must have procured or induced the breacho The defendant must have known about the breached term or turned a blind eye to it

o The defendant must have actually realized that the conduct procuring the breach would have that result

Limb 2 – Bailment on terms- When a bailor delivers goods to a bailee and expressly or impliedly authorizes the bailee to entrust the

goods to a third party (EG: Dry cleaner). The bailor is bound by the terms of the sub bailment contract on the basis of consent to them

- Law of bailment existed well before the law of contract

Morris v CW Martin- P contracts with Laundromat and sent mink for cleaning – Laundromat sends it to D for dry cleaning –

D and Laundromat sub contracted for cleaning – D was third party and mink was stolen- D were sub bailees so they owed a duty to P to take care of the mink even though the clauses in the

contract did not extend to cover liability for D – P as a third party to the sub contract can sue D even though she was not covered in sub contract – the relationship of bailor and bailee of a chattel can exist contract

KH Enterprise v Pioneer Container- P were owners of goods laden on D’s ship, Enterprise which sank with the cargo- Once a sub bailee voluntarily accepts possession of the goods knowing that they belong to someone else

other than the bailee (ie the bailor), then the sub bailee assumes the duties and obligations of the bailee- The sub bailee’s rights to rely on the terms and conditions upon which it accepted the goods from the

bailee depends on whether the bailor consented to the sub bailment on those terms – the consent can be express, implied, or constructive

Limb 2 – Acquisition of property with knowledge that a contract between other parties as affected that property- Where defendants acquire property knowing that its use is subject to some restriction by the original

contract, they can be restrained from acting inconsistently with that original contract

De Mattos v Gibson- Where a person acquires property from another by gift or purchase with knowledge of the previous

contract to use the property in a particular way, the acquirer act inconsistently with the original contract

Tulk v Moxhay- Applied De Mattos v Gibson – a restrictive covenant (a legal obligation imposed in a deed by the seller

upon the buyer of real estate to do or not to do something) can run with the land in equity

SS Co v Dominion Coal Co- Controversy over the extension of this principle in contracts – understandable in property cases since the

defendant would have paid less for property sold with knowledge of the restrictions applicable to it

Limb 1 – Considerations - The first limb of the privity doctrine needs to be considered in relation to its application to:

o Joint promiseeso Trust of promiseeso Agencyo Collateral contract, exemption and Himalaya clauses

- Allowing 3rd parties to sue but not to be sued is similar to unilateral contracts.

Joint promisees- Where a party enters into a contract with joint promisees and only one of them provides consideration

Coulls v Bagot’s Executor & Trustee Co- Developer enters into contract with Coulls and his wife to mine stone on Coulls’ property for royalties.

Coulls dies and wife seeks the royalties under the contract.- Held that both can enforce the contract – property understood, consideration moves from them both.- 3rd party would have to be physically there to witness the agreement between the contractual parties.

Trusts of promisees- A trust is an equitable obligation under which one person (the trustee) holds property on behalf of

another person (the beneficiary of cestui qui trust)- But the trust device has fallen into disuse because of the strict requirements of what constitutes a trust –

there must be specific intention on the part of the person declaring the trust that it should be trust because this can potentially outflank doctrine of privity

Les Affreteurs Reunis SA v Leopold Walford Ltd- The ship owners of a charter party contract promised the charterer that they would pay the broker

commission. The later refused to pay the commission. The broker’s action was treated as if the charterers had been added as plaintiffs.

- Held that the broker was entitled to the commission since the charterers, as trustees for the broker, could enforce the clause against the ship owners.

Re Schebsman- Schebsman’s company agreed to pay him compensation for firing him and if he died it would go to his

family. Schebsman went bankrupt and died, his trustee in bankruptcy claimed that the money was to be transferred to his estate and pay creditors.

- Held that the widow should benefit and company bound to pay her. But also held that the contract did not create a trust in favour of the widow and daughter.

- It must be established that the promisee intended the third party to have the benefit of the contract as a trustee and to make the contract irrevocable

Agency- Where an agency relationship exists between a principal and an agent to allow the agent to enter into

contracts with third parties. Where the agent discloses his status, he can contract on behalf of the principal.

- Principal also has the benefit of the contract where the agent has not disclosed his status, or where the principal ratifies an unauthorized act of the agent.

- These are sometimes seen as exceptions to the privity doctrine.

Dunlop Pneumatic Tyre Co v Selfridge- In this case, Dunlop can be considered as the principal and Dew is the agent. Selfridge would be the

third party. But to act as principal with the 3rd party, the principal would have to provide consideration. On the facts, Dunlop did not provide consideration for Selfridge.

Collateral contracts, exemptions, and Himalaya clauses- These situations bring the third party into a contractual relationship with one of the parties to the

contract

Shankin Pier v Detel Products- Contractors employed by Shanklin to paint the pier. Detel manufactured paint and said the paint would

be suitable. Shanklin told the contractors to buy the paint from Detel. Paint was not suitable.- Held that Shanklin could sue because there was a collateral contract between Detel and Shanklin.

Shanklin provided consideration by instructing the contractors to buy the paint from Detel.

Scruttons v Midland Silicones- Developed Himalaya clause: a clause injected to a contract for the benefit of a third party who is not a

party to the contract – EG: to protect stevedores- P contracted with D to ship crates. The goods were damages because of the stevedores. The stevedores

were under contract with the shipping company which contained an exclusion clause. D was not aware of this clause.

- Held that the stevedores could not rely on the clause in a contract which they were not parties of because (a) they there was nothing in that clause which expressly or impliedly indicated that the clause extended to protect them; and (b) the carriers did not contract as agents for the stevedores for the benefit of that clause.

- Four conditions:o If it is made clear that stevedores are to be protected in the exemption clauseo Where the carrier makes clear that these provisions should apply to the stevedores in a bill of

lading as agencyo The carrier has authority from the stevedores to do thato Stevedore provided some consideration

The Eurymedon- The Himalaya clause allowed third parties, stevedores, to be protected and take advantage of a limitation

of liability in a clause which limited liability between the carrier and shipper

Expanding the last category and an alternative approach

Southern Water Authority v Carey- There may be a reluctance to extend Himalaya clause outside carriage contracts because it tends to

outflank privity

The Mahkutai- Should not approach the four conditions in Scruttons v Midland as if it is set in stone – narrow

interpretation – should approach it more generally

London Drugs Ltd v Keuhne and Nagel International Ltd [SCC]- Favours development of contextual exceptions to the privity rule – can apply to commercial contexts –

case involved warehouse men damaging storage items- The warehouse men were able to rely on Scruttons v Midland since they were acting in their

employment and performing the services they contracted for

Privity and Remedies – Specific Performance- Common problem is that there are no remedies when the promisee who fails to perform his contractual

duty for the third party- Specific performance is an equitable remedy at the discretion of the court where remedies at law are

inadequate

Beswick v Beswick- In return for giving his business to nephew, nephew promised to give aunt weekly payments when he

dies. He dies and the nephew fails to pay up. She sued on behalf of the estate (so technically it doesn’t deal with exceptions to privity as she is not suing D as a third party)

- Specific performance available where damages are inadequate remedy – she is a 3rd party to contract and did not suffer any loss so she only got nominal damages at law (when suing as her husband’s estate)

Remedies – Damages where plaintiffs contract on their own behalf and on behalf of others- Whether plaintiffs can recover substantial damages for the loss suffered by the third party

Jackson v Horizon Holidays- P contracted with D for a holiday as advertised in the brochure for him and his family. Holiday did not

turn out as advertised.- Since P contracted for the benefit of himself and his family, as well as recovering for his own loss he

could also recover for that suffered by his family as a result of the breach. For Jackson to work, the fact situation must be similar to Jackson.

Woodar v Wimpey- D contracted to buy land from P and upon completion of the transfer to pay money to X. P terminated

the contract because statutory authority had started a compulsory purchase. P said the breach was repudiatory and claimed the full price for damages. Argued that Jackson v Horizon Holidays should apply to recover for 3rd party.

- Held that there is no repudiatory breach. But it was right that following Jackson, P could claim for X, the 3rd party to this contract if it is supported by special facts such as Jackson. Jackson should be supported by its special facts, but here the factual situation is different.

Cases involving a transfer of proprietary or contractual rights

Linden Gardens v Lenesta Sludge Disposals- Restrictions in transfers are intended to operate between the assignor and assignee

The Albazero- A party can recover loss suffered by a third party, in the context of a contract for carriage by sea under a

bill of lading- In commercial contexts, where goods can be transferred from one owner to another, the original party to

the contract is to be treated as if it entered into a contract for all parties who have or may acquire an interest in the goods in question – such later parties could recover damages

- EG: if A contracts with B to ship goods, and A sells the title to the goods to C, A can sue B on behalf of C.

St Martins Property Corp v Sir Rober McAlphine- Extended Albazero in a building context- Approach is known as the ‘narrow approach’

The broad approach - The plaintiff’s loss is grounded on the fact that they have not received performance to which they were

entitled to under the contract- But there are reservations on this approach

Common Mistake- An erroneous belief – may prevent mutuality of an agreement necessary for contract formation – must

be judged objectively with regard to all material facts

Types of Mistake

Unilateral Mistake- Only one party is mistaken about a term of a contract – gives rise to a voidable contract where the option

is at the innocent party – valid until the innocent party rescinds the contract – there is no agreement in unilateral mistakes

- Shogun Case – mistake of identity – voidable rather than immediately void

Mutual Mistake- Both parties make a mistake as to the terms of the contract – parties not on the same page – both agree to

buy/sell but make a mistake as to the price- Digilandmore.com Case

Common Mistake- Both parties make a mistake – consensus reached by both parties- McRae’s Case – the subject matter contract for is non existent- Types of common mistake

o Mistake as to the existence of the subject matter of the contracto Mistake as to identity of the subject mattero Mistake as to the possibility of performing the contracto Mistake as to qualityo Mistake in equity

- Seeks to put parties back into the position they were in had they not entered into the contract if void.

Res extincta- Both parties are mistaken as to the existence of the subject matter of the contract

Couturier v Hastie- Mistake as to existence of subject matter – Parties entered into a contract for sale of corn believed to be

in transit from Salonica to UK. Unknown to parties, corn was sold in Tunis before they contracted for the sale of corn.

- Held that the parties contemplated that the goods were existing at the time of contract – it was not the case and the buyer was not liable to pay the price.

Mistakes as to quality- A mistake as to quality made by both parties does not render performance as originally agreed

impossible

Bell v Lever Brothers- D entered into a contract with P to pay P 30,000 to leave the company. It was later revealed that there

were grounds to terminate P without compensation as P had previously breached original contract of employment.

- Common mistake (of quality) does not lead to a void contract unless the mistake is fundamental and essential to the identity of the contract – the mistake in this case was not great enough.

o The test in this case is whether the mistake as to the quality is an essential difference. It is a very narrow test.

o Constable analogy – if you buy a fake constable painting thinking it’s real, it is still not void as it is still a painting.

- Case law shows that this (earlier) test for common mistake was hardly ever satisfied except in res extincta (where the subject matter contracted for no longer exists) cases: Couturier v Hastie

Solle v Butcher- Landlord and tenant wrongly thought that the rent was outside the Rent Act limits when it was within.

Tenants could not recover the rent that was overvalue in law – you can only void the contract in law when the mistake is fundamental (operative) or if there is total failure of consideration. P had actually lived there for a period of time.

- Mistake would not make the tenancy void at common law, but it was voidable in equity. Rescission is available where it is unconscionable to allow one party to take advantage of the mistake in equity – results in equitable jurisdiction to rescind contracts entered into by common mistake though no total failure of consideration.

- Denning recognized that Bell v Lever Brothers would never be operative which is why he created remedies in equity.

McRae v Commonwealth Disposals Commission- D and P contracted for a shipwreck tanker thought to be in existence in the ocean. There is no such

tanker in existence at the location specified. - It is possible to contract a term to exclude liability for the non existence of the subject matter contracted

for – such a term can be implied also.- Held that there was a guarantee as to the existence of the wreck – contract interpreted in a way that

sellers would be liable for the non existence of the tanker – so breached the contract term as to the existence of the tanker.

o Here, P sues for the breach of the termo Group discussion: The alternative way is: to argue that the contract never existed: where the

existence of the tanker is a implied condition precedent to the actual contract (Associated Japanese Bank v Credit)

- Alternative reasoning: if there is a doctrine of mistake, then it wouldn’t apply here because the sellers are at fault (for the guarantee of the ship’s existence).

Great Peace Shipping v Tsavliris Salvage [2002]- There is no equitable jurisdiction to grant rescission for a common mistake which was not

fundamental at common law.o Approved McRae’s case and disapproved Solle v Butcher.

Equity follows the law you cannot give an equitable remedy if common law says that the contract is valid

o But this is post 1997 so Solle v Butcher can still be applied to Hong Kong. Some common law jurisdictions thinks Great peace is wrong.

- To void a contract due to common mistake:o There must be a common assumption as to the existence of the subject mattero There must be no warranty by either party that the subject matter existso The non existence of the state of affairs must not be attributable to either partyo The non existence of the state of affairs must render performance of the contract impossibleo The state of affairs may be the existence, or a vital attribute, of the consideration to be provided

or circumstances which must subsist of performance of the contractual adventure is to be impossible.

- Is the mistake sufficiently big to make the performance of the contract impossible?- Unclear whether this new test is satisfactory: Apvodedo v Collins; Graves v Graves- Rescission for common mistake impossible?

Digilandmore.com case- Obiter: maybe equity can be used- Unilateral mistake case: discussed Great Peace maybe it is too strict, maybe there is an equitable

remedy when the common law says the contract is valid

William Sindall v Cambridgeshire- Case below

Mistakes at law and in equity

- Doctrine of equitable mistake is thought to be wider than common law mistake. - At common law, mistake renders contract void. In equity, voidable.- Relief in equity may be granted on terms, at common law it’s all or nothing (eg. Relief can be granted

but must enter into a new contract)- Mistakes that are fundamental can void the contract in common law. Mistakes that are not so

fundamental can be voidable. - Rescission is available where it is unconscionable to allow one party to take advantage of the mistake

(Solle v Butcher). However, it is not available for common mistake (Great Peace v Tsavliris).- SO, in common mistake: contract is either void or valid in common law; no such thing as voidable

unless Solle v Butcher is followed.

Misrepresentation- Where one of the parties makes a false statement of fact to induce the other to enter into a contract

voidableo The representee can rescind the contracto Depending on the degree of fault by the representor, may be able to claim damages

- The likelihood that the statement was made by one party knowing that it was not trueo Fraud used to induce the other party to enter into a contract may give rise to legal liability

If the seller was not fraudulent but negligent

Hedley Byrne v Heller- Negligent misrepresentation inducing a contract – P asked D (a bank) for a credit reference for a client.

D said that the client was credit worthy but the client was not.- Negligent misrepresentations can give rise to legal liability and can be extended to pure economic loss

if:o The defendant carelessly makes a false statement to the plaintiffo The circumstances are such that it is reasonable to assume that the statement will be relied upono There is a special relationship between the parties

Misrepresentation and terms of contract- The breach of a term of contracts gives rise to strict liability and expectation damages liability arises

under the contract on a breach its terms- But if misrepresentation became a term of a contract then according to:

o S2 of Misrepresentation Ordinance the party is entitled to rescind the contract- Even if misrepresentation has become a term, a party can still rely on the law of misrepresentation.- The party may want to rely on misrepresentation rather than treating it as a breach of a term of contract

as reliance loss based on misrepresentation may be greater than expectation loss as a term of contract.

Non Disclosure- Generally non disclosure is not a misrepresentation. Silence is golden. You can’t be liable for

misrepresentation for non disclosure – caveat emptor. - But some contracts are uberrimai fidei (of the utmost good faith) where there is an obligation to disclose

everything that is material (eg. Insurance contracts). In these kind of contracts usually one party has much more knowledge of the material information than the other. For example, an insurer would need to disclose all material facts that would affect the prudent insurer of estimating risk. But it is not essential for the material facts to have a decisive effect on the insurer’s acceptance of the risk.

Keates v Earl of Codagan

- Landlord did not tell prospective tenant that the condition of the house was horrible. Held that non disclosure of material information was not misrepresentation. Silence is not misrepresentation if it does not involve fraud.

What counts as misrepresentation?- An unambiguous false statement of fact, or conduct that has that effect, to induce the innocent party to

enter into contract

Edgington v Fitzmaurice- Unambiguous false statement – P issued a circular to investors to borrow for business expansion when

in fact it was going to be used to pay debt. Held that the untrue statement as to the future intention was a misrepresentation. As long as it is one of the factors which induced innocent party to enter into the contract, it is still a misrepresentation.

Bisset v Wilkinson- A statement of opinion – P wanted to buy land from D and asked D whether it can hold 2000 sheep. The

seller did not run a sheep farm before and said he believed it can hold 2000 sheep when it couldn’t. Held that a statement of opinion is not a misrepresentation if D is not an expertise in the opinion.

The statement of fact may be implied- A statement of fact may be implied

Crystal Palace FC v Dowie- Implied representations as to a statement of intention – D was a manager of FC and his contract

stipulated that he would have to pay compensation for leaving the FC. He said that he was going to move for family reasons and because of this FC agreed to let him leave without penalty. D said he had no contact with other FCs at the time, impliedly representing that he had no intention of joining other FCs whereas he did have such an intention. He joined another FC.

- Held that this was actionable misrepresentation which induced P to the agreement. Statement of intention could be interpreted as misrepresentation.

Gordon v Selico- Representation implied from conduct – D wanted to sell a house so hired independent contractors to

make the house look better for selling. The contractors just covered up the rot without eradicating it. P saw the house and bought it.

- Held that the action of concealing the rot amounted to misrepresentation that the house did not suffer from rot.

Spice Girls v Aprilia- Misrepresentation by conduct – Scooter company contracted with Spice Girls for an ad campaign on

the assumption that they would remain intact. One of them left. Held that it was misrepresentation by conduct because the participation by all members induced the company to contract.

Statement of facts

Dimmock v Hallet- Half truths – Seller of land told the buyer that the land would still have tenants, but in fact the tenants

had given notice to leave. Made minor statements about other lots of the property had been rented out.- Held that this statement was misleading and amounted to misrepresentation because these

representations can lead someone to believe that the land would still be continued to be rent out when sold to new buyer of land. Leaving out this fact distorted the whole picture for the buyer.

Failure to disclose change of circumstances

With v O’Flanagan- D sold P a business with reported income of 2000. But before the signing of the contract, D failed to

disclose that the income had fallen. - Held that there is a duty to disclose material changes in circumstances that were represented to be

true in negotiations. This is continuing until the contract is signed.

Wales v Wadham- Wife promised husband not to remarry to get alimony. After the agreement had been signed, she

remarried.- Held that a promise regarding to future intention is not a statement of fact. So the wife’s promise can’t

be misrepresentation. Her change in intention was made AFTER she made the contract for alimony.

Inclusive Technology v Williamson- The principle in Wales v Wadham depends on the context and nature of the statement of intention, ie

whether it is a continuing statement of intention into the future. If so, there is a duty to speak in the event of a change in the previously declared intention before the contract is ultimately made.

The statement must generally be one of fact- This excludes statements as to future conduct, except so far as they involve statements of the intention

that amounts to statements of facts- Mere puffs or sales hype is not misrepresentation- The distinction between fact and opinion is difficult. Cases do not exclude liability where the reliance is

placed on knowledge of expertise of the representor. - Statements of law can also give rise to misrepresentation.

East v Maurer- D sold salon to P saying that he will not run a competing business. D ran a competing business

immediately after the sale taking all the clients.- Held that loss of profit is recoverable if it is fraudulent misrepresentation.

Smith v Land and House Property Corp- D sold a hotel to P telling P that a flat was let to Fleck, a desirable tenant. He was not desirable at all.- Held that although this may be a statement of opinion, P was relying on D’s expertise and knowledge

and it can be taken to be implied misrepresentation.

Pankhania v Hackney LBC- Statement of law – D told P that the car park was let out to a tenant on a contractual license, but actually

on a protected tenancy. Legal status of tenancy had been misrepresented- Held that a statement of law can give rise to misrepresentation.

The statement must induce the representee to enter into the contract- Inducement has two main issues:

o Materiality – the significance of the representation to a reasonable persono Reliance – the impact on the representee

Redgrave v Hurd*- D sold house to P and stated that it was worth 300 but it was worth only 200. - Held that a representee is under no duty to check the truth of a statement – also no inducement if

representee knows it is untrue. Where material, there is an inference that the misrepresentation

induced the contract. It would be up to D to prove that P knew it was untrue or that the statement was not relied on (reverse onus on D)

Attwood v Small- The misrepresentation will not be operative where representees have carried out their own

investigations on which they have relied upon. If P can show that there was some reliance on the misrepresentation, then it is actionable.

The representation need not be the sole inducement

JEB Fasterners v Mark Bloom- It is enough that a misrepresentation plays a real and substantial part, though not by itself a

decisive part, in inducing the plaintiff to enter into the contract.

Remedies for misrepresentation- If the misrepresentation is fraudulent, plaintiff is entitled to rescission plus damages in tort for deceit- If the misrepresentation is not fraudulent, plaintiff is entitled to rescission plus damages under the

Misrepresentation Ordinance s3(1)- If the misrepresentation is not fraudulent but is negligent, plaintiff may be entitled to damages under

Hedley Byrne v Heller (pure economic loss on reliance)- If innocent misrepresentation, then you can only get rescission or damages in lieu

Rescission- It is the principal remedy in misrepresentation – undoes the contract and restores the status quo.- The contract is voidable ab initio (from the beginning) – executory obligations don’t need to be

performed and executed obligations are undone.- Rescission is regarded as a self help remedy: Car and Universal Finance Co v Caldwell – P effectively

rescinds sale of car to fraudster by telling police and rescinded contract before fraudster on sells car

Bars to rescission

Representee affirms contractLong v Lloyd

- D sold P a lorry and continues to use it even after discovering the truth. Held to be affirmation of contract

Lapse of timeLeaf v International Galleries

- Purchased a fake Constable painting but enjoyed it for 5 years before bringing an action. Held to be affirmation of contracts

Intervention of third party rightsCrystal Palace FC v Dowie

- ‘Rescinding’ the new agreement (of letting D free without charging penalty thereby making him go back to Crystal Palace FC) is impossible as D already contracted with 3rd party, the new FC

Impossibiligy of making restitio in integrum (restoring to original condition)Clark v Dickson

- P bought shares as a result of misrepresentation by D’s directors. Company winded up, value dropped and discovered that the representations were false.

- Cannot rescind the contract as he could not restore the shares in its original state (impossibility) as he took them.

Thomas Witter v TBP Industries- P bought business as a result of misrepresentation and made significant changes to the operation,

management, etc. of the business. Sought rescission when discovered misrepresentation.- Held not entitled to rescission as the company had changed significantly (impossibility) and became

much more difficult for restitio in integrum even though representation was negligent.

Erlanger v New Sombrero- If substantial restitution is possible, then the court could reward rescission also giving financial

adjustment to the part that was not possible (equitable remedy)

The more liberal approach of equity- Equity more likely to grant rescission on terms.

Halpern v Halpern- It doesn’t matter if precise restoration cannot be brought so long as monetary awards could be made to

restore the parties in the position they were in.- If it involves something such as destroyed documents, put some monetary value on those documents.

Partial Rescission is not permitted

TSB Bank v Camfield- Rejected a claim for partial rescission and held that a charge had to be set aside entirely. Rescission on

terms shouldn’t go too far – can’t get partial rescission – can’t just let the court rewrite the contract.

- Wife induced to give a guarantee for 15000, but instead it was unlimited guarantee. - Whether you could rescind it back to where she was liable to 15,000. Court says no, it just goes back to

no contract at all. If it is void, then it is not partial rescission, it is total rescission.

De Molestina v Ponton- Rejected partial rescission on the basis that it conflicted with the essential nature of the remedy of

rescission as restutio in integrum.

Vadasz v Pioneer Concrete- High Court of Australia held that the court could set apart part of a contract guarantee whiles leaving the

remainder.

Fraudulent Misrepresentation- If there is a fraudulent misrepresentation, the claimant may have an action in tort of deceit.- Rescission if possible, plus damages in tort of deceit.

Derry v Peek- Fraudulent misrepresentation is more than negligence – misrepresentation had been made (1) knowingly

or (2) without belief its truth or (3) recklessly and careless whether it be true or false

Measure of damages for fraudulent misrepresentation- Liability for fraudulent misrepresentation is in tort, so the position that the plaintiff should be in had the

fraudulent misrepresentation not been made- Fraud is an exception in terms of foreseeability because the defendant is liable for all losses which

flow as a result of the fraudulent misrepresentation even if they are not foreseeable. All losses are a result of the deceit is recoverable.

- Fraud invokes the protective and punitive policies of the law designed to discourage this conduct.

Smith New Court Securities v Scrimgeour Vickers- Victim of major fraud by 3rd party caused a major fall in share price and force the sell of shares at a low

price. - Remoteness doesn’t matter, so long as loss is caused by fraudulent misrepresentation, can recover all

losses flowing from it. - In assessing damages for fraudulent misrepresentation:

o (1) The defendant is bound to make reparation for all damage directly flowing from the transaction;

o (2) Although such damage need not be foreseeable, it must be directly caused by the transaction;o (3) In assessing such damage, the plaintiff is entitled to recover by way of damages the full price

paid, but must also give credit for any benefits received from the transaction;o (4) As a general rule, the benefits received by him include the market value of the property

acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him from obtaining full compensation for the wrong suffered;

o (5) Although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either

(a) The misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset; or

(b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property

o (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction;o (7) The plaintiff must take all reasonable steps to mitigate his loss once he has discovered

the fraud.

East v Maurer- Expectation damages as a result of the fraudulent misrepresentation are not recoverable but lost of profit

flowing directly from the transaction is recoverable. Reliance interest, not expectation interest recoverable.

Clef Acuitaine SARL v Laporte Materials- P entered into contract with D to buy goods to sell. D misrepresented the selling price and sold it to P for

the misrepresented price. P claimed that they could have had a better deal if they found someone else but relied on D’s representation and got ripped off.

- Held that if P could prove that a more favourable transaction would have been entered into but for the deceit, it’s loss of opportunity could be recovered on that basis.

Further points on deceit

Standard Chartered v Pakistan National Shipping- There is no reduction in damages in deceit for the plaintiff’s own contributory negligence.

Downs v Chappell- The plaintiff/ innocent party will be required to mitigate losses

Non fraudulent misrepresentation at common law- Negligent misrepresentation gives rise to liability at common law- Without liability in negligence, there is no remedy at common law for purely innocent

misrepresentation. The contract can be rescinded if it is induced by innocent misrepresentation at equity. - The plaintiff must prove a special relationship, where there is an assumption of responsibility, and that

the damage was reasonably foreseeable.

o Like negligence, plaintiff has to show duty of care, breach, and that it caused the reasonably foreseeable damage.

Hedley Byrne v Heller- Negligent misrepresentation inducing a contract – P asked D (a bank) for a credit reference for a client.

D said that the client was credit worthy but the client was not.- Negligent misrepresentations can give rise to legal liability and can be extended to pure economic loss

if:o The defendant carelessly makes a false statement to the plaintiffo The circumstances are such that it is reasonable to assume that the statement will be relied upono There is a special relationship between the parties

- Where the person making the misrepresentation is not party to the contract: Can S3(1) apply?o If you are barred from rescission, you cannot get damages in lieu of rescission (see Floods of

Queensferry, Government of Zanzibar, etc (though contrast Thomas Witter). Therefore, if you cannot rescind due to third-party rights – or, in this case, because the induced contract was between the rep’tee and a 3rd-party, then the rep’tee would not be able to claim under s.3(2).

Esso Petro v Mardon- If opinion is made by a person with greater skill and expertise in relation to the subject matter, a

reasonable care and skill is required.- Denning case – Forecast made by Esso on measurement of filling station. They knew all the information

and was in a better position than Mardon. Esso ought to have known it would be relied on by Mardon. Different from Bisset v Wilkinson in that here the party had skill and expertise.

Fraudulent misrepresentation – Misrepresentation Ordinance Section 3(1)- A person who made a fraudulent misrepresentation to induce the other party into a contract is liable in

damages if the party suffered loss, unless he can prove that he reasonably believed in the truth of what he said during the representation.

- Fiction of fraud = liability in damages would exist where it would exist had the misrepresentation been fraudulent even though the representation is not fraudlent.

- S3(1) only applies when there is a contractual relationship with representee + representor. It does not apply in a Hedley Byrne situation (can only rely on common law)

Howard Marine and Dredging Co v Ogden & Sons- Held that there was insufficient evidence to argue that there was an honest belief in the representation

made – failed to show any ‘objective reasonable ground’ for relying on P’s recollection.o There must be reasonable and objective belief in the misrepresentation

- During negotiations between P and D, D relied on P’s recollection of a fact to enter into a contract to find that it was incorrect. D refused to pay.

Fiction of Fraud- Liability extends to all losses flowing directly from the misrepresentation even though it is not

fraudulent- Only for the recovery of damages

Royscott Trust Ltd v Rogerson- Non sequitur (does not follow logically) – Negligent misrepresentation is a fictitious fraudulent one –

(1) The extent of damages under S2(1) [same as S3(1) MO] was the same as that for common law fraud – damages flowing from a misrepresentation even if unforeseeable. (2) But selling a car to a rogue was foreseeable, so it didn’t constitute NAI and they were liable to damages.

- Fiction of fraud – the negligent misstatement was not fraudulent but treated as fraudulent. - Rogue financed a car from Honda and used Royscott Trust as a financier. Honda (innocently)

misrepresented the price of the actual car and induced Royscott to finance the rogue. Royscott would not have financed but for the misrepresented price. Examined whether for a false statement the misrepresentee was liable for all consequences and whether the rogue constituted NAI which prove the chain of causation (as in an action for negligence).

Naughton v O’Callaghan- D misrepresented the breed of race horse for P to buy. P bought it, trained it, and lost in all races, and the

value of the race horse fell dramatically as the breed was not of the type represented. Bought an action under S2(1) [S3(1) MO]. Held that the aim of damages under S2(1) was based on the fiction of fraud an all lost flowing from the misrepresentation was recoverable.

Gran Gelato v Richcliff*- Contributory negligence – where there is concurrent liability for negligent misrepresentation by

one and contributory negligence by the other, it will be taken into account when assessing damages.

- P signed a lease with D and a term stipulated that the break clause would only start to operate in 5 years. One year prior to the 5 year minimum period, D exercised the break clause. P claimed damages for negligent misrepresentation under S2(1) and D used contributory negligence as a defense. P was contributorily negligent in that D did not see the headlease prior to entering into the lease.

Fiction of Fraud and policy considerations- Difficult to justify fiction of fraud in policy terms

Smith New Court Securities v Scrimgeour Vickers- Raises the question of whether the loose wording of statute compels the court who is morally innocent

as if he was guilty of fraud when it comes to measure of damages.

Avon Insurance v Swire Fraser- Courts should not be willing to find that there is an actionable misrepresentation unless the

representation is substantially false for the application of S2(1)- Don’t want to apply fraudulent measures on an innocent person because it is so strict.

Damages in lieu of rescission – S3(2) Misrepresentation Ordinance- Entitled to rescind a contract if entered into by fraudulent misrepresentation. Damages may also be

awarded in lieu of rescission if in the opinion of the court it is equitable to do so.o Having regard to the loss that would have been incurred had the contract been upheld and the

loss that the rescission would cause them.

Relationship between S3(1) and S3(2)- Claimants can claim damages under S3(1) if conditions (ie fraudulent misrepresentation) is met, but can

only appeal to the discretion of the court for S3(2)- Damages under S3(1) aimed at compensating representee for the fact that contract had not been

rescinded. Damages under S3(2) are lesser as the contract is rescinded.

Difficulties with S3(2)- Does ‘in lieu of rescission’ exclude awards of damages where rescission is barred? Yes

Government of Zanzibar v British Aerospace- Remedy of rescission should be available if damages are to be awarded in lieu of that remedy if

misrepresentation is wrong enough

- In this case, D sold P a plane, but the plane was returned due to faulty manufacturing, and the finance company which P financed it though sold it to a third party. Rescission is therefore impossible. But it was held that damages are available only as a substitute for rescission when the court believes damages are more equitable as a solution.

- Even if the rescission was barred, there is no possible rescission because of eg. Lapse of time, it is still possible to award damages in lieu.

Thomas Witter v TBP Industries- Rescission is not available where it is impossible to restore the parties back to their original

positions. However, damages could be awarded where rescission is no longer available. Under S2(2), the right to damages did not depend on the right to rescission – it was only necessary that the right to rescind had existed in the past.

- Recklessness is not negligence. You cannot prove negligence and say the other person is reckless.

- What is ‘loss that would be caused if the contract were upheld’? Is it the contractual measure?

William Sindall v Cambridgeshire- Exercising discretion under S2(2), must consider: the nature of the misrepresentation; loss caused were

the contract upheld; and taking into account the loss suffered by P and the ‘gross disparity’ suffered by D

- Hoffman said that S2(1) concerned damage flowing from entering into the contract, S2(2) concerned damage caused by the property not being what it was represented to be. The point of S2(2) was to prevent representees trying to get out of a bad bargain to the detriment of representors.

- D sold land to P when P said there were no easements on land. Turns out there was a sewer there all along after P bought the land. Land value plummeted. P sued D for misrepresentation.

o Nature of the misrepresentation: it was a 5m sale but the misrepresentation would only cost 18k to remedy

o Loss caused were the contract upheld: it is not the compensation of loss (5m) but damages for the MISREPRESENTATION (18k)

o Taking into account that the loss of bargain was 8m for D, and the gross disparity to the loss to P- The discretion conferred by s2(2) is a broad one, to do what is equitable. The courts must have regard to

in exercising discretion:o The nature of the representation. This means that the court was meant to consider the

importance of the representation in relation to the subject matter of the transactiono The loss that would be caused by the representation if the contract were upheldo The loss that rescission would cause to the other party (Gross Disparity caused to D)

Excluding liability for non fraudulent misrepresentation – Misrepresentation Ordinance S4 (S3 of UK act)- Exclusion clauses for misrepresentation or remedies available to the representee by reason of

misrepresentation have no effect unless it satisfies the requirement of reasonableness in S3(1) of Control of Exemption Clauses Ordinance

- If a misrepresentation is made by an agent on behalf of a party, then any term excluding or limiting that agent’s authority operates to protect the principal and is outside the scope of S4

Overbrook Estates v Glencombe Properties- A clause where a principal limits the authority of its agents does not fall within S3 (S4 MO). P was

not responsible for the misrepresentation by its agent, D (auctioneer). S3 did not apply in this case, as the term in the contract worked to limit the principal’s responsibility of the agent’s representations – the clause did not give ostensible authority to the agent.

- D bided for P’s property in an auction, but it was misrepresented by the auctioneer (agent).

Pearson v Dublin Corp- You can’t exclude the liability for your own fraud

HIH v Chase Manhattan Bank- You can only exclude your agent’s or employee’s fraud if you made it clear

Six Continent Hotels v Event Hotels- Can’t exclude liability subject to reasonableness test – burden of proof on the person who claims it

Inntrepreneur Pub Co v East Crown Ltd- Entire agreement clauses (where a term declares that it is the complete and final agreement between the

parties) do not affect the status of a statement as a misrepresentation. Entire agreement clauses do not fall within S4.

- But where an excluding liability clause exists with an entire agreement clause in a contract, S4 will still apply to the liability exemption clause only.

Watford Electronics v Sanderson- Where there is an exemption clause which stipulates that there is no representation relied upon by a

party. - A contract between P and D stipulated that ‘no statement or representations by either party have been

relied upon’. - Such a non reliance clause meant that the innocent party was estopped from asserting reliance on any

misrepresentation so that S3 (S5 MO) was inapplicable. - For commercial certainty it was important for parties to be able to make clear what matters were relied

and not relied upon in entering agreements.

A clause that clearly attempts to subvert the policy of the statute will not be effective to exclude liability under S4

- Clauses that clearly attempt to subvert the statute will not exclude liability under S4

Howard Marine v Ogden- A clause stipulated that ‘acceptance of handing over the vessel shall be conclusive that they have

examined the vessel and found her in all respects seaworthy, in good order and condition in all respects fit for the intended and contemplated use by the charterers and in every other way satisfactory to them’

- Held that it could not be reasonable to exclude liability for misrepresentation in respect to information to which the representor had access and the representee did not. A clause which clearly subverts the CECO and MO will not work.

Cremdean Properties v Nash - P contracted to buy property from D. D misrepresented that there was planning permission for a lot of

space. But in fact the figure was much lower. A footnote clause stipulated that D would not be liable because the accuracy of their representation is not guaranteed or free from error, and that it was up to the purchaser to verify the truth of what was represented. The footnote was an attempt to make it so that the terms were not ‘representations’.

- Tried to reclassify statements of fact as statements of opinion. Cannot circumvent S3 this way.- Held that the clause fell within S3 different from Overbrook Estates v Glencombe in that that case

involved an agent.

Section 4 and CECO- Control of Exemption Clauses Ordinance A clause to subvert S4 can only work if it satisfies

reasonableness under CECO S3(1)

Six Continent Hotels v Events Hotels- The fact that a term is capable of reaching fraudulent misrepresentations does not, as a matter of

construction, necessarily mean that it falls foul of S4- A clause stipulated that each party agree not to sue each other this was argued to be so wide

that it would cover fraud, negligent, and innocent misrepresentation. - The clause was held to be unreasonable, as such a clause would offer no possibility of severing

fraudulent misrepresentations.

Misrepresentation Ordinance S2- Where a person has entered into a contract after a misrepresentation has been made to them, and the

misrepresentation has become a term of the contract and/or the contract has been performed (terminated/discharged), then if otherwise he would be entitled to rescind the contract without alleging fraud, he would be so entitled.

Aspects of Remedies

The action for the agreed sum- Allows the party to the contract to recover the agreed (contractual) sum for his or her performance of

their obligation- Action lies where the sum is due and payable under the contract – usually where claimant has performed

their obligation- Controversial issue

o Where the defendant repudiates the contract and the plaintiff elects to continue with the performance of the contract, and having performed claims the agreed sum

o Factors relevant to the solution of this issue are: the nature of the plaintiff’s election; the plaintiff’s ability to perform the contract without the defendant’s cooperation; and the undesirability of foisting an unwanted performance on the defendant and so effectively causing economic waste

White & Carter v McGregor- An action for an agreed sum (liquidated damages claim) where the plaintiffs were able to continue with

performance and claim the agreed sum without having to mitigate. - Subject to two qualifications:

o That the repudiating party can prove that the affirming party has no interest to affirm – then he has no right to the agreed sum

o That the innocent party should be able to perform without the other party’s cooperation

Clea Shipping v Bulk Oil (The Alaskan Trader)- Legitimate interest test P hired a ship for 2 years, D repudiated but P affirmed the contract and kept

the ship running, then sued for damages. Held that P should have terminated the contract at an earlier stage.

- Although in general there was an unfettered right to elect, in exceptional cases the court would exercise its general equitable jurisdiction to refuse to allow the injured party to affirm if there was no legitimate interest in performing the contract rather than claiming damages.

Ocean Marine Navigation v Koch Carbon (The Dynamic)- Exception to the rule that the innocent party has an option to accept the repudiation (only applies in

extreme cases)o The burden is on the contract breaker to show that the innocent party has no legitimate interest in

performing the contract rather than claiming damages

o This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss of the contract breaker

o The exception to the general rule applies only in extreme cases: here damages would be adequate and where an election to keep the contract alive would be (wholly) unreasonable.

Hounslow LBC v Twickenham Garden Developments- Ability to perform without the cooperation of the guilty party – P contracted D to work on a site. D

repudiated, but P refused to accept repudiation and elected to proceed, then claimed damages against D. - The ability to perform without cooperation and so be in a position to claim the contract price –

cooperation in this context meant passive as well as active cooperation.- Held that D had no right to insist to continue to perform.

Reichman v Beveridge- Landlord could not choose to affirm and seek money due under the contract following the anticipatory

breach by the tenant because damages would be an adequate remedy and it was wholly unreasonable to elect to affirm was argued by D.

- BUT, it was not unreasonable for an innocent landlord to refuse to find a new tenant; damages might not be adequate because rent may be at a lower market rate so damages could not be recovered for loss of the difference in rent.

Restitution in the case of contracts void for mistake- Where money is paid under a contract that has been breached, the innocent party can recover the

payment if there is a total failure of consideration.

Whincup v Hughes- A watchmaker died after performing one year of his contractual obligations. None of the money paid in

consideration could be recovered despite just a small portion of the contractual obligation being fulfilled.

Stocznia Gdanska SA v Latvian Shipping- To be a total failure of consideration the test was not whether the purchasers had received anything

under the contract, but whether the parties had performed any part of their contractual duties.

Innocent party can claim reasonable value on quantum meruit

Planche v Colburn- Where services are the benefit conferred on the guilty party and no contractual provision applies to their

remuneration

British Steel v Cleveland Bridge- Quantum Meruit claim

Restitution in mistake cases- Where mistake renders a contract void, restitutionary remedies follow the same general pattern as breach

cases

McRae v Commonwealth Disposal Commission - Money paid is recoverable if there is a total failure of consideration- Quantum Meruit and Quantum Valebet available for services rendered or goods provided.

A number of you are having difficulty understanding the law of misrepresentation. This is understandable, since the law of misrepresentation is very difficult: it lies on the borders of tort and contract and law and equity.You may find it useful to get clear in your mind three fundamental points in revising the law:(1) Liability in contract is distinct from liability in tort. Without more, an action to rescind a contract is concerned with the contract alone. If you rescind a contract for a misrepresentation, you cannot then get damages for breach of that contract (since the contract is undone). But if the misrepresentation is fraudulent, you can still get damages in the tort of deceit. That's because liability exists independently in tort: it fastens on the fraud, not the contract. So there is nothing wrong with saying you can rescind the contract and get damages (in tort) for the fraudulent misrepresentation.(2) Liability is distinct from remedy. The remedies in issue here are rescission and damages. We now tend to think of rescission solely as an equitable remedy, damages solely as a legal remedy. Provided it is not barred, rescission is a remedy available in response to any misrepresentation, whether fraudulent, negligent or purely innocent. Apart from statute (see (3) below), damages are available only in response to fraudulent or negligent misrepresentations (the actions being tortious). (3) Liability and remedies provided for in the Misrprepresentation Ordinance are in addition to those provided by the common law and equity. Subject to the misrepresentor being able to satisfy its "reasonable belief" test, section 3(1) provides that damages can be awarded where a misrepresentation that induces a contract is not made fraudulently. (Rescission would also be available here in principle: see (2) above). Section 3(2) acts as a restraint on the ability to rescind for a non-fraudulent misrepresentation inducing a contract, providing for an award of damages in place of rescission in cases where it is "equitable" to do so. The possibility of damages being awarded under s3(2) and s3(1) is provided for in s 3(3).(4) The measures of damages under both s 3(1) and s 3(2) is controversial.