Court of Appeal considers the Misrepresentation Act 1967 and damages in lieu of rescission/avoidance

Section 2(2) of the Misrepresentation Act 1967 provides that, where a person has been induced to enter into a contract because of a negligent/innocent misrepresentation, "and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of the opinion that it would be equitable to do so…"

At first instance in this case, it was held that rescission was not possible, but that decision was reversed by Harris HHJ. If it was correct to say that rescission was impossible, though, would damages still be available under section 2(2)? That is an issue which has been discussed in various cases and on which there is conflicting prior authority. However, the point has not yet been decided by the Court of Appeal.

In this case, the Court of Appeal unanimously concluded that "the words "in lieu of rescission" must, in my view, carry with them the implication that rescission is available (or was available at the time the contract was rescinded). If it is not (or was not available in law) because e.g. the contract has been affirmed, third party rights have intervened, an excessive time has elapsed or restitution has become impossible, rescission is not available and damages cannot be said to be awarded "in lieu of rescission"". Accordingly, the discretion to award damages under section 2(2) is not available if restitution is no longer possible. On the facts here, though, rescission was still possible (and lapse of time on its own cannot be a bar to rescission).

COMMENT: Although not conclusively decided by the courts yet, it seems to be the case that the Misrepresentation Act 1967 applies to insurance contracts, although there is caselaw suggesting that section 2(2) does not apply to commercial contracts of insurance (on the basis that if a right to avoid exists, that remedy should not be denied by the courts). Even if section 2(2) does apply to insurance policies, it is unclear how the Insurance Act 2015 will impact on this issue when it comes into force. The 2015 Act will abolish any rule of law permitting a party to an insurance contract to avoid the contract on the ground of breach of the duty of utmost good faith (although insurers can still avoid in certain circumstances under the 2015 Act). Where avoidance is not available though (eg because a negligent misrepresentation was made by the insurer to the insured), it is arguable that, following this case, the discretion to award damages under section 2(2) instead will not arise (although possibly a separate claim in equity could be brought by the insured).