Shogun Finance Ltd v Hudson

JurisdictionUK Non-devolved
JudgeLORD NICHOLLS OF BIRKENHEAD,LORD HOBHOUSE OF WOODBOROUGH,LORD MILLETT,LORD PHILLIPS OF WORTH MATRAVERS,LORD WALKER OF GESTINGTHORPE
Judgment Date19 November 2003
Neutral Citation[2003] UKHL 62
Date19 November 2003
CourtHouse of Lords
Shogun Finance Limited
(Respondents)
and
Hudson (FC)
(Appellant)

[2003] UKHL 62

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Hobhouse of Woodborough

Lord Millett

Lord Phillips of Worth Matravers

Lord Walker of Gestingthorpe

HOUSE OF LORDS

LORD NICHOLLS OF BIRKENHEAD

My Lords,

1

This appeal raises a difficult problem about the effect of fraudulent misrepresentation on the formation of a contract. If a crook (C) fraudulently represents to the owner of goods (O) that he is another identifiable person (X) and on that basis O parts with goods to C by way of sale, is there in law a contract between O and C? Does the answer to this question differ according to whether O and C communicated face to face, or by correspondence, or over the telephone, or by e-mail? The law on cases involving this type of fraudulent conduct, euphemistically described as cases of 'mistaken identity', is notoriously unsatisfactory. The reported decisions are few in number and they are not reconcilable. In the present case Sedley LJ said the law has tied itself into a Gordian knot. Brooke LJ said the law is in a 'sorry condition' which only Parliament or your Lordships' House can remedy: see [2002] QB 834, 847, 855.

2

Two features are usually present when cases of this type come before the court. The first feature is that a seller of goods is concerned with the creditworthiness of the proposed buyer. The seller wants to be sure he will be paid for the goods he is handing over. Here the common law seems to have drawn a distinction between two kinds of fraudulent misrepresentation. The common law distinguished between a case (1) where a crook fraudulently asserts he is creditworthy and a case (2) where a crook fraudulently asserts he is someone else known to be creditworthy. One might suppose there is no difference of substance between these two cases. These are merely two ways a crook may assert a spurious creditworthiness. But, historically, the law seems to have been otherwise. In case (1), when the seller parts with his goods he does so pursuant to a voidable contract. This is said to be a case of mistake as to a person's attributes. In case (2), in some circumstances but not all, the seller has been held to part with his goods pursuant to a void contract, that is, no contract at all. This is said to be a case of mistake as to a person's identity.

3

The second feature usually present in cases of this type is that the crook then sells the goods to an innocent third party. This feature explains why the distinction between a voidable and a void contract matters. Having fraudulently acquired the goods from their owner, the crook then sells them to an unsuspecting third party. The rights of this innocent third party may depend upon the nice distinction between a voidable contract and a void contract. In case (1), where the crook fraudulently misrepresents his own financial standing, the loss falls on the unfortunate owner of the goods who was tricked into parting with them to the crook. King's Norton Metal Co Ltd v Edridge, Merrett and Co Ltd (1897) 14 TLR 98 is an instance of this. There the crook ordered some brass rivet wire from a metal manufacturer. On his writing paper he represented he was in business in a big way, running a large factory and having several depots and agencies. The manufacturer, King's Norton, supplied the goods sought but was not paid. King's Norton was unable to recover the goods or their value from the third party to whom the crook subsequently sold them.

4

This outcome is to be contrasted with case (2), where the crook asserts he is someone else. In such a case the loss sometimes, but not always, falls upon the unfortunate third party who also was a victim of the crook's trickery. The third party paid for the goods in all honesty, but he must return them to their original owner or pay their value. Thus in Cundy v Lindsay (1878) 3 App Cas 459 Cundy had to pay the linen manufacturers Lindsay & Co for the 250 dozen cambric handkerchiefs the crook acquired from Lindsay by fraudulently representing he was the respectable business firm of Blenkiron.

5

The distinction in outcome thus drawn between these two kinds of fraudulent misrepresentation, one as to 'attributes' and the other as to 'identity', is unconvincing. It has been described as a reproach to the law. To a considerable extent the distinction has now been eroded. Cundy v Lindsay (1878) 3 App Cas 459 was decided over a century ago, and since then there have been significant developments in this area of case law. Unfortunately these developments have left the law in a state of disarray. The question before the House on this appeal is whether this distinction, so far as it remains, should still be regarded as good law.

Fraudulent misrepresentation and intention

6

The question before the House calls first for some analysis of the effect of fraudulent misrepresentation on a person's intention to enter into a contract. A contract of sale and purchase, like any other contract, requires agreement, a meeting of minds. The seller must intend, or appear to intend, to sell the goods, and the buyer must intend, or appear to intend, to buy the goods on the agreed terms. The presence of fraud does not negative the existence of such an intention on the part of either party. Fraud does not negative intention. A person's intention is a state of mind. Fraud does not negative a state of mind. The existence of a fraudulent misrepresentation means that a person's intention is formed on a false basis - a basis, moreover, known by the other party to be false. The effect of fraud is to negative legal rights or obligations otherwise flowing from an intention to enter into a contract. Fraud enables the victim of the fraud to decline to proceed with a contract into which, by reason of the fraudulent misrepresentation, he was induced to enter, and he has a claim for damages for any loss he may suffer. But fraud does not have the consequence of negativing the formation of a contract.

7

Similarly with consent: as noted by Robert Goff LJ in Whittaker v Campbell [1984] QB 318, 327, in this context fraud does not 'vitiate' consent. Professor Glanville Williams rightly said that the maxim 'fraud vitiates consent' is thoroughly misleading: see 23 Canadian Bar Review (1945) 271, 291-292. Whether a person has consented to this or that is a question of fact. Fraud does not negative a fact. As with intention, so with consent, fraud negatives legal rights or obligations otherwise flowing from a person having given his consent to a particular happening. Fraud can destroy legal rights; it cannot destroy facts.

8

This distinction, between negativing intention or consent and negativing the rights otherwise flowing from intention or consent, is important. It explains why the law treats a contract induced by fraud as voidable, not void. The necessary coincidence of intention, or consensus ad idem, may exist even where the intention and consent of the victim were induced by fraud. An intention thus induced is regarded by the law as sufficient to found a contract, even though the victim may repudiate the contract as soon as he discovers the fraud.

9

Thus, if a person is induced to buy goods by a fraudulent misrepresentation that the goods are sound, in law a contract to buy the goods is created even though the goods are different from the goods the buyer intends to buy and even though the other party knows this. The fact that the goods are different in quality from the goods which, as the crook knows, the victim wishes to buy is not regarded by the law as meaning that no contract was made.

10

This approach is not confined to cases of differences of quality. The law adopts the same approach where the goods offered for sale are fraudulently misrepresented to be a unique item such as the original of a specific painting by a named artist or the football shirt worn by Bobby Moore in the 1966 World Cup final match. The buyer wishes ('intends') to buy the particular original painting or the particular shirt and nothing else. The seller knows this. But the effect of the misrepresentation is that the buyer, believing the proffered goods to be as represented, agrees to buy the proffered goods. He enters into a contract on the basis of what he believes is the position. In law he contracts to buy the proffered goods even though, looking more broadly at his state of mind, he had no intention of buying anything other than the original of the particular painting or the particular football shirt. If intention is considered in this broad sense, there is no 'meeting of minds' whenever one party is persuaded by the other to enter into a contract by a material fraudulent misrepresentation made by the other. But for the purpose of deciding whether a person had the necessary intention to enter into a contract with the crook, a person's intention is considered more narrowly. It is assessed by reference to what he believed the position to be. The fact that his belief was induced by the other's fraudulent misrepresentation entitles him to repudiate the contract. His belief means there was a contract, but the fraudulent inducement of his belief means the contract is voidable.

11

The position is similar if the owner of goods agrees to sell them to a prospective buyer on the basis of a fraudulent assertion of his financial reliability. The buyer's fraudulent statement about himself does not negative the seller's intention to sell the goods to the crook on the agreed terms. Nor does it negative the fact that, when the crook acquired the goods from the seller, he did so with the seller's consent. The fraud means only that the seller's contractual intention was formed, and his consent to hand over the goods obtained, on a...

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