[1991] 3 All ER 294
Court of Appeal
The facts are stated in the judgement of Balcombe LJ.
Balcombe LJ
The second defendant to the action and the appellant in this court. Maidenhead Honda Centre Ltd ('the dealer'), is a motor car dealer. At the beginning of May 1987 the first defendant, Mr Andrew Jeffrey Rogerson ('the customer'), agreed with the dealer to buy on hire-purchase a second hand Honda Prelude motor car for the price of £7,600, of which a deposit of £1,200 was to be paid, leaving a balance of £6,400. The plaintiff and the respondent to this appeal, Royscot Trust Ltd ('the finance company'), is a company which finances hire-purchase sales. It does so in the usual way, that is by purchasing the car which is the subject of the sale from the dealer and then entering into a hire-purchase agreement with the customer.
The finance company has a policy that it will not accept a hire-purchase transaction unless the deposit paid represents at least 20 per cent of the total cash price. On 5 May 1987 the dealer submitted a proposal to the finance company in relation to the customer's proposed purchase of the car, by which the dealer represented to the finance company that the total cash price payable was £8,000 and that a deposit of £1,600 had been paid by the customer. It will be observed that the balance under these figures, £6,400, is the same as that which was truly payable by the customer. It is common ground that this was a misrepresentation and that in reliance upon it the finance company entered into a hire-purchase agreement with the customer dated 5 May 1987 under which the customer agreed to pay a total price (including the deposit) of £9,878.92, of which the balance of £8,278.92 was to be paid by 36 monthly instalments of £229.97. At no time has it been pleaded or claimed by the finance company that in making this representation the dealer was acting fraudulently. Accordingly, in making its claim for damages the finance company relies on innocent misrepresentation under s2(1) of the Misrepresentation Act 1967. In fact the customer paid the dealer a deposit of £1,200, and the finance company paid the dealer the sum of £6,400.
The customer paid to the finance company under the hire-purchase agreement monthly instalments amounting in all to £2,774.76. In August 1987 the customer dishonestly sold the car to a private purchaser for the sum of £7,200; that purchaser acquired a good title to the car under the provisions of the Hire-Purchase Act 1964. The customer told the finance company in August 1988 that he had wrongfully disposed of the car a year previously and on 28 September 1988 made his last monthly payment to the finance company. The car was then said to be worth at least £6,325.
On 22 September 1989 the finance company issued proceedings against both the customer and the dealer in the Uxbridge County Court and on 23 November 1989 entered judgement in default against both defendants for damages to be assessed. It was that assessment of damages which came before Judge Barr on 22 February 1990.
As against the customer the judge assessed the finance company's damages as £5,504.16 (the balance of £8,278.92 less the instalments paid of £2,774.76), and judgement in that sum was entered against him. There has been no appeal against that judgement.
Before the judge, counsel for the finance company submitted that its loss was the difference between the sum of £6,400 which it paid to the dealer and the sum of £2,774.76 paid by the customer, viz £3,625.24...
So I turn to the issue on this appeal which the dealer submits raises a pure point of law: where (a) a motor dealer innocently misrepresents to a finance company the amount of the sale price of, and the deposit paid by the intended purchaser of, the car, and (b) the finance company is thereby induced to enter into a hire-purchase agreement with the purchaser which it would not have done if it had known the true facts, and (c) the purchaser thereafter dishonestly disposes of the car and defaults on the hire-purchase agreement, can the finance company recover all or part of its losses on the hire-purchase agreement from the motor dealer?
The finance company's cause of action against the dealer is based on s2(1) of the Misrepresentation Act 1967...
As a result of some dicta by Lord Denning MR in two cases in the Court of Appeal - Gosling v Anderson and Jarvis v Swans Tours Ltd - and the decision at first instance in Watts v Spence there was some doubt whether the measure of damages for an innocent misrepresentation giving rise to a cause of action under the Act of 1967 was the tortious measure, so as to put the representee in the position in which he would have been if he had never entered into the contract, or the contractual measure, so as to put the representee in the position in which he would have been if the misrepresentation had been true, and thus in some cases give rise to a claim for damages for loss of bargain. Lord Denning MR's remarks in Gosling v Anderson were concerned with an amendment to a pleading, while his remarks in Jarvis v Swans Tours Ltd were clearly obiter. Watts v Spence was disapproved by this court in Sharneyford Supplies Ltd v Edge. However, there is now a number of decisions which make it clear that the tortious measure of damages is the true one. Most of these decisions are at first instance... One at least, Chesneau v Interhome Ltd, is a decision of this court. The claim was one under s2(1) of the Act of 1967 and the appeal concerned the assessment of damages. In the course of his judgement Eveleigh LJ said:
... '[damages] should be assessed in a case like the present one on the same principles as damages are assessed in tort. The subsection itself says: '... if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable. . .' By 'so liable' I take it to mean liable as he would be if the misrepresentation had been made fraudulently.'
In view of the wording of the subsection it is difficult to see how the measure of damages under it could be other than the tortious measure and, despite the initial aberrations referred to above, that is now generally accepted. Indeed counsel before us did not seek to argue the contrary.
The first main issue before us was: accepting that the tortious measure is the right measure, is it the measure where the tort is that of fraudulent misrepresentation, or is it the measure where the tort is negligence at common law? The difference is that in cases of fraud a plaintiff is entitled to any loss which flowed from the defendant's fraud, even if the loss could not have been foreseen: see Doyle v Olby (Ironmongers) Ltd. In my judgement the wording of the subsection is clear: the person making the innocent misrepresentation shall be 'so liable,' ie, liable to damages as if the representation had been made fraudulently. This was the conclusion to which Walton J came in F&B Entertainments Ltd v Leisure Enterprises Ltd. See also the decision of Sir Douglas Frank QC, sitting as a High Court judge, in McNally v Welltrade International Ltd. In each of these cases the judge held that the basis for the assessment of damages under s2(1) of the Act of 1967 is that established in Doyle v Olby (Ironmongers) Ltd. This is also the effect of the judgement of Eveleigh LJ in Chesneau v Interhome Ltd already cited: 'By 'so liable' I take it to mean liable as he would be if the misrepresentation had been made fraudulently.'
This was also the original view of the academic writers. In an article, 'The Misrepresentation Act 1967' (1967) 30 MLR by PS Atiyah and GH Treitel, the authors say:
'The measure of damages in the statutory action will apparently be that in an action of deceit . . . But more probably the damages recoverable in the new action are the same as those recoverable in an action of deceit . . .'
Professor Treitel has since changed his view. In Treitel, The Law of Contract, 7th ed, he says:
'Where the action is brought under s2(1) of the Misrepresentation Act, one possible view is that the deceit rule will be applied by virtue of the fiction of fraud. But the preferable view is that the severity of the deceit rule can only be justified in cases of actual fraud and that remoteness under s2(1) should depend, as in actions based on negligence, on the test of foreseeability.'
The only authority cited in support of the 'preferable' view is Shepheard v Broome, a case under s38 of the Companies Act 1867, which provided that in certain circumstances a company director, although not in fact fraudulent, should be 'deemed to be fraudulent.' As Lord Lindley said: '... To be compelled by Act of Parliament to treat an honest man as if he were fraudulent is at all times painful,' but he went on to say: 'but the repugnance which is naturally felt against being compelled to do so will not justify your Lordships in refusing to hold the appellant responsible for acts for which an Act of Parliament clearly declares he is to be held liable...' The House of Lords so held.
It seems to me that that case, far from supporting Professor Treitel's view, is authority for the proposition that we must follow the literal wording of s 2(1), even though that has the effect of treating, so far as the measure of damages is concerned, an innocent person as if he were fraudulent. Chitty on Contracts says:
'... it is doubtful whether the rule that the plaintiff may recover even unforeseeable losses suffered as the result of fraud would be applied; it is an exceptional rule which is probably justified only in cases of actual fraud.'
No authority is cited in support of that proposition save the passage in Professor Treitel's book cited above.
Professor Furmston in Cheshire, Fifoot and Furmston's Law of Contract says:
'It has been suggested [and the reference is to the passage in Atiyah and Treitel's article cited above] that damages under s2(1) should be calculated on the same principles as govern the tort of deceit. This suggestion is based on a theory that s2(1) is based on a 'fiction of fraud.' We have already suggested that this theory is misconceived. On the other hand the action created by s2(1) does look much more like an action in tort than one in contract and it is suggested that the rules for negligence are the natural ones to apply.'
The suggestion that the 'fiction of fraud' theory is misconceived occurs in a passage which includes the following:
'Though it would be quixotic to defend the drafting of the section, it is suggested that there is no such 'fiction of fraud' since the section does not say that a negligent misrepresentor shall be treated for all purposes as if he were fraudulent. No doubt the wording seeks to incorporate by reference some of the rules relating to fraud but, for instance, nothing in the wording of the subsection requires the measure of damages for deceit to be applied to the statutory action.'
With all respect to the various learned authors whose works I have cited above, it seems to me that to suggest that a different measure of damage applies to an action for innocent misrepresentation under the section than that which applies to an action for fraudulent misrepresentation (deceit) at common law is to ignore the plain words of the subsection and is inconsistent with the cases to which I have referred. In my judgement, therefore, the finance company is entitled to recover from the dealer all the losses which it suffered as a result of its entering into the agreements with the dealer and the customer, even if those losses were unforeseeable, provided that they were not otherwise too remote...
Accordingly, I would dismiss the dealer's appeal. I would allow the finance company's cross-appeal, set aside the judgement of 22 February 1990, and direct that in its place judgement be entered for the finance company against the dealer in the sum of £3,625 24 together with interest. The finance company accepts that it will have to give credit for any sums that it may receive from its judgement against the customer.