In the case of Salt v Stratstone Specialist Ltd the Court of Appeal decided a highly relevant point; if you’ve been sold a lemon by a car dealer, can you reject it and get your money back, or do you have to settle for compensation?
Mr Geoffrey Alan Salt was a car enthusiast, with an interest in luxury and sports vehicles. In early September 2007 Stratstone Specialist Ltd (“Stratstone”) telephoned him and offered to sell to him a Cadillac CTS 3.6 litre Sport Luxury car which was described as “brand new”. Mr Salt agreed on the telephone to buy it for £21,895 and it was delivered to him on 29th September 2007. however, the vehicle was not brand new because, although it had never had a registered owner, it had been manufactured in 2005 and delivered to Stratstone on 23rd March 2005. It had had various repairs in the course of 2005 and 2006 and had been involved in a collision serious enough to have damaged the front wheels and caused the nearside front tyre to split (quite how all this was done without the car being registered is a mystery).
The vehicle had numerous defects which begun to emerge after Mr Salt had bought it. There were problems with the ignition, the battery, the catalytic converter, the oil warning light, the windscreen wipers and the satellite navigation system. The filter on the petrol intake proved to be defective and Mr Salt was, on one occasion, stranded while using the vehicle.
The car was a lemon; what could Mr. Salt do? Stratstone repaired some (if not all) of these defects but by 16th September 2008 Mr Salt had had enough, tried to reject the vehicle and asked for his money back. Stratstone refused to reimburse him (although he offered to settle for £4,000), so on 24th March 2009 Mr Salt issued proceedings complaining that the car was not of merchantable quality and seeking damages. In September 2009 he stopped using the vehicle and completed a statutory off-road notice declaration. He never used it again.
Section 1 of the Misrepresentation Act 1967 Act provides that rescission (ie effectively rolling back a contract entered into as a result of misrepresentation) was available. Section 2 of the Act gave the courts a power to award damages for misrepresentation in the following terms:-
“2. Damages for misrepresentation
Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, 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 notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.
Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, 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 opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.”
In this case, the first Judge to hear it (District Judge Hickman) thought damages was more appropriate than rescission, which still left Mr. Salt with the turkey. On appeal the second judge (His Honour Judge Harris QC) took the opposite view and held he was entitled to rescind the contract (ie return the car) and recover the price which he had paid (plus interest and costs).
District Judge Hickman decided that he could not order rescission because he could not put the parties back in their original position because the car had now been registered and could not be returned as an unregistered car; also, there had been a considerable lapse of time since the sale and he could not adjust the amount of the price that would be repayable to allow for the depreciation of the vehicle. He held that Mr Salt was confined to a remedy in damages which he assessed at the difference between the value of the car at the time of sale if it had been new (£22,000.00) and the actual value of the car at the time of purchase (£19,000.00) together with £250.00 for the inconvenience caused by the defects which needed repair. He therefore gave judgment for Mr Salt for £3,250.00.
Mr Salt appealed and His Honour Judge Charles Harris QC sitting in Oxford reversed the District Judge, holding that it was possible to restore the parties to their original position. The car still existed; the fact of registration could not be a bar to rescission; any difference in value of the car was Stratstone’s problem. He therefore ordered rescission and the repayment of the purchase price in exchange for the return of the car. He also gave Mr Salt his costs on an indemnity basis because, before he issued proceedings, he had offered to accept £4,000.00 in settlement. Stratstone then appealed.
The words of the statute are “if it is claimed … that the contract ought to be or has been rescinded the court … may declare the contract subsisting and award damages in lieu of rescission”. The words “in lieu of rescission” 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”. The question the Court of Appeal faced therefore was, was restitution impossible?
The first reason given by DJ Hickman is that the car had been registered to Mr Salt after sale and that returning a registered car would be to return something different from the article he bought. If that were right, it would always be impossible to rescind a contract for a car which was wrongly said to be new. The Court didn’t accept this, as registration is a legal concept which does not change the physical entity that a car is. His second reason for saying that the parties could not be restored to their original position is that there had been some delay. His third reason is that a car is a depreciating asset and that the delay (such as it was) constituted a prejudice to Stratstone (although it would have been easy to compensate Stratstone for this). A further point that DJ Hickman might have made was that Mr Salt had had the benefit of using the car between the date of its delivery in September 2007 and the date when he stopped using the car.
DJ Hickman said:
“If I had been provided with the evidence to allow me to make an assessment of the position, it might perhaps have been possible to direct rescission on a partial rather than a complete refund of the purchase price that Mr Salt paid. But I do not have that evidence. For the reasons I gave in refusing to permit re-amendment of the particulars of claim, I am not going to take a course which would entail the obtaining of further evidence, and frankly, given the extreme unlikelihood on past history of these parties agreeing on anything, a further hearing. This case has already become utterly disproportionate in terms of the parties’ costs and in terms of the call on the court’s resources. Again, some assessment of that position might have formed the basis for a sensible mediated settlement, but that did not happen.”
Judge Harris QC took the contrary view saying:-
“Manifestly a good deal of time has now gone by, but it is clearly the case that the defendants could be given back what they sold, namely the car. It has in fact not been driven since September 2009, such was its unreliability. It is no doubt worth less than it was at the time of the sale, especially as it has covered some 15,000 miles, but neither party seems to have called any evidence about this. Since that sale was only achieved by misrepresentation, it could be said to be equitable, that is fair, for the seller to bear this loss rather than the claimant, who if he had not been deceived would never have bought the car in the first place, and who because of the defendant’s misrepresentation acquired a two and a half year old car which was troublesome instead of a sound new one.”
The normal remedy for misrepresentation is rescission, and the Court held that this remedy should be awarded if possible, particularly perhaps in a case in which a defendant makes no attempt to prove that he had reasonable grounds to believe its representation was true. In the Court’s view, Mr Salt was entitled to rescind the contract. Rescission was prima facie available if “practical justice” could be done. Mr Salt was able to return the lemon and recover most of the price which he paid; he was awarded £21,895 plus his legal costs (which by this stage were completely disproportionate).
Stratstone tried to argue that the lapse of time was also an issue that counted against Mr. Salt. The authority usually cited under this head is Leaf v International Galleries  2 KB 86 in which the claimant in 1944 bought a picture of Salisbury Cathedral represented to be by “J. Constable” for £85. It is a somewhat curious case since you would think that a genuine Constable painting of Salisbury Cathedral, even in 1944, would be worth considerably more than £85, But the Court of Appeal did not permit rescission in 1949 partly in the light of the considerable delay between purchase and bringing the action.
The Sale of Goods Act provides that a buyer is not deemed to have accepted the goods until he has had a reasonable opportunity of examining them for the purposes of ascertaining whether they are in conformity with the contract, and that the question that is material for the purposes of determining whether a reasonable time has elapsed (with the result that the buyer is to be deemed to have accepted the goods) includes the question whether the buyer has had such reasonable opportunity for examining the goods.
The court was unable to determine whether a reasonable time had elapsed without Mr Salt having rejected the goods. In this case, Mr Salt only became alive to the point after disclosure of documents had taken place, and in any event, the Court found that it would not be fair on Mr Salt to allow Stratstone to rely on a suggestion that, because he was too late to reject the car, he was likewise too late to rescind the contract. Here the ground on which rescission became available (ie that the car was not in fact new) only became known to Mr Salt on disclosure of documents. Most of the subsequent delay was due to the litigation process and Stratstone’s wrongful refusal to take the car back and return the price.
HHJ Harris ordered that Stratstone should pay Mr. Salt’s costs, and went further; he order that the costs incurred since the date of Mr. Salt’s offer to settle were to be assessed on an indemnity basis as Stratstone had in his view been unreasonable in rejecting the offer. In the words of the Court of Appeal it was a case that cried out for settlement. Mr Salt had tried to settle it at an early stage (as well as at later stages). Stratstone “played for high stakes and lost”. It was ordered to pay not only the £21,895 but also the costs, including £35,000 on account of those costs.
The right to reject for breach is now more complex as the Consumer Rights Act 2015 has come into force: in particular sections 20-24. under that Act it is now no longer be possible to align the equitable right to rescind for pre-contractual misrepresentation with the statutory scheme governing contractual rights.
For more information contact David Vaughan-Birch.