6.7.2.4 Measure of damages for innocent misrepresentation

By about the middle of the 19th century, the equity courts in England provided persons induced to contract by an innocent (non-fraudulent) misrepresentation the remedy of rescission of the contract.1 In some cases a very drastic remedy, because all performances of the contract had to be undone. The Misrepresentation Act 1967 gives in section 2(2) the court the power to award damages in lieu of rescission, if it is of the opinion that it would be equitable to do so. The court may only award damages under subsection 2 if, in the particular circumstances of the case, the claimant had the right to rescind the contract.2

The question crises which measure of damages is appropriate as remedy for innocent misrepresentation. Section 2(3) of the Misrepresentation Act 1967 states:

Subsection 3 clearly indicates that the damages under subsection 2 should, or at least can, be less than those under subsection 1. At least, it seems logical that any damages awarded for a wholly innocent misrepresentation should be lower than those awarded for a negligent misrepresentation.3

In Wm Sindall plc v Cambridgeshire Count), Council,4 the county council sold to the claimant, a firm for construction of residential development, at the height of the property boom of the late 1980s a school playing field. Subsequently, the property market collapsed and at that point in time the claimants by chance discovered that a sewage pipe crossed the land. The claimants then sought to rescind the sales contract on the separate grounds of common mistake and misrepresentation. The Court of Appeal held that there was neither misrepresentation nor mistake sufficient to entitle the claimant to rescission. Even though it became unnecessary to decide the issue raised under section 2(2) because the award of damages is dependent upon the existence of a right to rescind, Lord Justice Evans nonetheless ruled that: 'the contract measure [...] becomes the correct measure in circumstances where the plaintiff is entitled to an order for rescission, but rescission is refused under section 2(2) of the Act. The difference in value between what the plaintiff was misled into believing that he was acquiring, and the value of what he in fact received, seems to me to be the measure of the loss caused to him by the misrepresentation in a case where he cannot rescind the contract and therefore retains the property which he received.' 5

McGregor considers the application of the contractual measure wrong6 because this could, among others, result in awarding damages for the consequential loss incurred by the huge fall in the market value of the property in case of innocent misrepresentation while the same loss would be irrecoverable in case of negligent7 or even fraudulent8 misrepresentation. A fortiori, these consequential losses must be irrecoverable under section 2(2) of the Misrepresentation Act 1967.9 Furthermore, the courts hold that a claimant representee claiming rescission must be capable of putting the defendant representor in the position he was in before the contract was concluded. This cannot be done where the subject-matter of the contract has deteriorated in the hands of the claimant.10 A vast reduction in market value must count as deterioration. However, in Armstrong v Jackson,11 the court did not refuse rescission even though the shares purchased deteriorated in value between the time of contract and the time of action, because the defendant breached a fiduciary duty and made a fraudulent misrepresentation.