1.

Smith v Hughes (1870) LR 6 QB 597

Contract – Mistake – Breach of Contract – buyer beware – Caveat Emptor

Facts

The complainant, Mr Smith, was a farmer and the defendant, Mr Hughes, was a
racehorse trainer. Mr Smith brought Mr Hughes a sample of his oats and as a
consequence of what he had seen, Mr Hughes ordered 40-50 quarters of oats from Mr
Smith, at a price of 34 shillings per quarter. To begin with, 16 quarters of oats were sent
to Mr Hughes. When they arrived, he said that the oats were not what he had thought
they were. As he was a racehorse trainer and he needed old oats, as this was what the
horses had for their diet. The oats that were sent to Mr Hughes were green oats, the
same type as the initial sample. Mr Hughes refused to pay Mr Smith for the delivery and
remaining order.

Issues

Mr Smith argued that Mr Hughes had breached the contract as he had not paid for the
delivery and future oats to be delivered. The issue in this case was whether the contract
could be avoided by Mr Hughes, as Mr Smith had not delivered the type of oats he had
expected.

Held

It was held that there was a contract between Mr Smith and Mr Hughes and that it
would not be avoided. There had been no discussion between the parties regarding the
delivery of old oats. An objective test revealed that a reasonable person would expect
the sale of good quality oats in a similar contract, since there was no express discussion
of old oats. The sample gave him the chance to inspect the oats and this was an
example of caveat emptor (buyer beware).
 

2. HIH Casualty and General Insurance Ltd v Chase

Manhattan Bank [2003] UKHL 6 House of Lords

Chase Manhattan advanced substantial sums to finance the production of a film

syndicate. HIH provided insurance for the event that the film did not make enough
revenue to repay the loan. Chase Manhattan made the insurance a condition of getting
the loan and also specified the agent, Heath North America (HNA), that must be used to
obtain the insurance. HNA obtained the insurance policies but in doing so made certain
fraudulent misrepresentations and failed to disclose a report that suggested the films
were unlikely to make a profit. The films did not generate sufficient revenue to cover the
loan and Chase sought to claim under the insurance policy. The insurance company
refused to pay out claiming to rescind the contract for misrepresentation and a failure to
disclose a material factor as required under s.19 & 20 of the Marine Insurance Act 1906
(applicable to all insurance contracts not just marine insurance). S.18(3) (c) of the Act
provides that the insured need not disclose information which has been waived by the
insurer. The contract of insurance contained a truth of statement clause which provided:

"[6] the Insured will not have any duty or obligation to make any representation,
warranty or disclosure of any nature, express or implied (such duty and obligation being
expressly waived by the insurers
[7] and shall have no liability of any nature to the insurers for any information provided
by any other parties
[8] and any such information provided by or nondisclosure by other parties including,
but not limited to, Heath North America & Special Risks Ltd (other than section I of the
questionnaire) shall not be a ground or grounds for avoidance of the insurers'
obligations under the policy or the cancellation thereof."

Chase sought to rely on this clause to argue that the insurance company could not
rescind the contract.
Held:

The clause was ineffective. The insurers were entitled to rescind the contract of
insurance through both the misrepresentation and the non-disclosure.
 

3. With v O’Flanagan [1936] Ch 575

Whether representations are ongoing

Facts

The claimant entered into negotiations with the defendant for the purchase of the
defendant’s medical practice. During the negotiations, the defendant represented to the
claimant that the practice took in around £2,000 per year. The defendant signed the
contract for the purchase some five months later, but by this date, the practice had
declined significantly as a result of the ill health of the defendant. When the claimant
took possession of the practice, it was discovered that it was now almost non-existent.
The claimant sought to rescind the contract on the basis that the representation as to
the income had been a misrepresentation. At first instance, it was held that the
representation was, at the time it was made, accurate and therefore, because this
meant that the claimant could not demonstrate that the representation was untrue, the
claim must fail. The defendant appealed.

Issue

The issue in this circumstance was whether there remained an obligation to inform a
party to a contract when the circumstances material to a representation, which induced
them to enter into the contract, had changed.

Held
The Court of Appeal reversed the decision at first instance. It was held that the
representation made by the defendant was intended to induce the claimant to enter into
the contract and therefore would be considered ongoing until the contract was signed.
This meant that at the time that the contract was signed, the representation was untrue.
The defendant ought to have told the claimant of the change of circumstances.

4. Horsfall v Thomas (1862) 1 H & C 90

Contract law – Fraudulent statement

Facts

The plaintiff was employed by the defendant to make him a steel gun which the
defendant would pay for with two bills of exchange. The plaintiff delivered the gun to the
defendant but it had a defect which would have been recognised by the defendant had
he examined it. This would have entitled him to reject the gun. Instead, the defendant
did not examine the gun and delivered the bills of exchange as agreed. The plaintiff
later wrote to the defendant stating that the gun had no faults and was made from the
best metal. The defendant subsequently tested the gun, which was faulty, and sued the
plaintiff. The action of the defendant was brought on the basis that he was encouraged
to accept the gun by the fraud of the plaintiff.

Issue

The defendant claimed that as part of this fraud, the plaintiff had actively concealed the
defect in the gun from him ahead of the inspection. Further to this, it was argued by the
plaintiff that the statement that was made by the letter from the defendant was
fraudulent as it had stated that the gun had no faults.

Held
The court found that there was no evidence to support the claim of the plaintiff that the
defendant had acted fraudulently. With regards to the inspection, the court found it
impossible that the plaintiff hides a defect from the defendant, as the defendant had not
considered looking at this at the time of inspection. Moreover, the court found that the
letter that was later sent by the defendant did not contain any fraudulent statement as
the defendant believed the statement was correct and accurate.

5. Attwood v Small [1838] UKHL J60

The claimants purchased Corngreaves estate from the defendant for £600,000.
Corngreaves estate consisted of mining land, iron works and various properties
including a mansion house. Many of the properties were subject to leasehold and
generated income. The mines were to be worked by and profit to go to the claimant. A
preliminary agreement was made between the parties whereby the claimant agreed to
purchase subject to being satisfied that the reports and accounts given by the defendant
were accurate. The claimant then had his accountants and directors check out the
accounts and reports who were satisfied they were accurate. The claimant then
proceeded with the purchase. It then transpired that the accounts had greatly
exaggerated the income generated by the estate and the claimant sought to rescind the
contract based on the misrepresentations contained in the reports and accounts.

Held:

The claimant was unsuccessful. By getting his own experts to check out the reports he
had not relied on the accounts but his own judgment.

6. Redgrave v Hurd (1881) 20 Ch D 1

Contract law – Misrepresentation – Specific performance

Facts
The plaintiff was a solicitor who constructed an advertisement titled ‘Law Partnership’
where he sought a successor who he would take as a Partner on the basis that the
individual purchased the plaintiff’s property. The defendant responded and was
interviewed at which point he was informed the business was worth £300 per year. The
defendant then wrote to the solicitor asking the amount of business completed in the
last three years. The plaintiff showed documentation showing almost £200 per year and
offered the defendant the opportunity to assess the accounts. The defendant
subsequently agreed to purchase the property but having placed a deposit on the
property and taking possession, he found the business was actually worthless and
refused to complete the remainder of the agreement. The plaintiff appealed for specific
performance. The judge in the first instance found in favour of the plaintiff and the
decision was appealed.

Issue

A matter for the court was to establish the extent of the misrepresentation of the plaintiff
and whether the defendant should have been expected to undertake further research
into the proposed business by having a look at the accounts which had been presented
by the plaintiff.

Held

The court reversed the decision of the trial judge and they allowed the contract to be
rescinded on the basis of innocent misrepresentation. It is important to note that the
court did not find fraudulent misrepresentation. The court found that the defendant was
not under a duty to inspect the papers and that his reliance on the plaintiff’s
misrepresentation was enough.

7. Derry v Peek (1889) 14 App Cas 337

Tort law – False representation

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.

8. Car & Universal Credit v Caldwell [1964] 2 WLR 600

Mr Caldwell sold his Jaguar car on 12th Jan to a rogue, Norris, who had paid £10 cash
deposit and left another car as security and gave a cheque for £965. The following day
Mr Caldwell went to cash the cheque and discovered it was fraudulent and the car left
as deposit turned out to be stolen. Mr Caldwell reported the incident to the police and
used his best endeavours to co-operate with the police to find Norris in order to rescind
the contract of sale. He also contacted the Automobile Association to try to locate the
car. Norris had acquired a voidable title to the car as the contract was induced by
fraudulent misrepresentation. Norris sold the car on to a third party on 15th Jan. The
question for the court was whether the actions taken by Mr Caldwell were sufficient to
avoid the contract.

Held:

Mr Caldwell had successfully rescinded the contract. He had taken all steps possible to
demonstrate that he no longer wished to be bound by the contract. He should not be
prejudiced by the fact that his endeavours failed to locate Norris.

9. Long v Lloyd [1958] 2 All ER 402

Contract law – Sale of goods – Innocent misrepresentation

Facts

The plaintiff was a haulage contractor who saw an advert for the sale of a lorry which
was described as in ‘exceptional condition’. The plaintiff saw the vehicle the following
day and the defendant stated that the lorry could drive at 40mph. Also, during a test
drive, the defendant stated that the vehicle did 11 miles to the gallon. The plaintiff
noticed defects on the vehicle and purchased the vehicle for a reduced price, paying half
of the cost that day. Two days later, the plaintiff drove the vehicle and discovered
serious issues and that the petrol tank was 8 miles to the gallon, rather than 11 and told
the defendant. Following this, the plaintiff allowed his brother to take the lorry on a
business trip where it again had broken down. The plaintiff brought an action to rescind
the contract on the basis of innocent misrepresentation.

Issue

The issue for the court was to establish under which circumstances the plaintiff could
rescind the contract for the sale of the lorry between the parties. Specifically, this
required the court to consider the statements made by the defendant regarding the
condition of the lorry.
Held

The court rejected the claim of the plaintiff. It was held that innocent misrepresentation
allowed the plaintiff to rescind after the contract had been executed, but that the
plaintiff would lose such a right after the goods had been accepted. In sending the lorry
on the business trip with his brother, the plaintiff had construed final acceptance of the
vehicle and had therefore lost the right to rescind the agreement.

10. Leaf v International Galleries [1950] 2 KB 86

Contract law – Sale of goods – Misrepresentation

Facts

The plaintiff purchased a picture from the defendants who represented that it was
painted by the artist, J. Constable. Five years later, the plaintiff tried to sell the painting
at an auction house and was told it had not been painted by the artist he had been told
previously. He subsequently returned the painting to the defendant who retained it for
inspection. The plaintiff brought an action to rescind the contract as the defendant had
responded maintaining that the artist of the painting was J. Constable, despite the
information that the plaintiff had been given by the auction house. The trial judge found
in favour of the defendants, despite explaining that they had made an innocent
misrepresentation regarding the artist of the painting, on the basis that the contract had
been executed.

Issue

There were two important issues for the court to provide a decision on. The first was
whether the plaintiff had the right to rescind the contract, five years after agreeing on
the terms with the defendant. The second issue was whether the mistake as to the
painter of the art was fundamental enough to void the contract between the parties.

Held

The plaintiff’s claim had failed as a significant amount of time had lapsed between
agreeing the contract and the window to rescind. The court found that the mistake that
was made regarding the painter of the art was fundamental but it was not severe
enough to make the contract void. On this basis the plaintiff’s claim failed.