going back to the original position. As the remedy of rescission is an
equitable one, in certain circumstances where unfairness would arise it
is not allowed (see bars to rescission later). Note that a fraudulent
misrepresentation can be used as a defence if the innocent party is sued
for rescission. They can refuse to hand over goods or benefits obtained
through the contract. This may arise, for instance, where a party has
obtained insurance cover by fraudulent misrepresentations (remember
these contracts are uberrimae fidei). If the contract is rescinded, the
insurance company is entitled to keep any premiums paid.Non-fraudulent misrepresentation
Before 1964 there was only a remedy of rescission for non-fraudulent
misrepresentation, and damages were not available unless fraud was proved
(see above). Any non-fraudulent misrepresentations were regarded as
‘innocent’, and therefore without a monetary remedy.
In 1963, the House of Lords changed this position by stating, obiter, that
in certain circumstances, where a negligent mis-statement resulted in
financial loss, damages may be recovered in tort. For this liability to arise,
there had to be a duty of care, arising from a ‘special relationship’ between
the parties. In the case of Hedley Byrne and Co Ltd v Heller and Partners
Ltd (1964) (see p. 172), the banker, Heller, was seen to have been negligent,
rather than deliberately fraudulent. Had it not been for a technical matter,
the court would have been willing to make an award of damages, even
though fraud was not proved. Another example is seen in Esso v Mardon
(p. 168) which despite going to court in 1976 actually took place before the
Misrepresentation Act was passed in 1967.
Although it is not certain exactly what the term ‘special relationship’
means, some guidelines do exist. Firstly, the principle of liability is based
on the duty of care in tort.
Secondly, from Esso v Mardon (see above, p. 168) it is likely that such a
relationship will be considered to exist where the representor possesses
relevant knowledge or skill, and would expect the other party to rely on this.
176 Contract law
Donoghue v Stevenson (1932)
When a partly decomposed snail was found in a bottle of ginger beer,
it was held that the manufacturer of the drink owed a duty of care to the
eventual consumer, and was therefore liable for her inconvenience and
illness. This is known as the ‘neighbour’ principle (where it is
foreseeable that a person will be affected by actions, then a duty of care
is owed to that person).