Innocent misrepresentation

There is no right to damages for innocent misrepresentation - they can only be awarded in lieu of rescission (section 2(2), Misrepresentation Act 1967) and only if the right to rescind still exists. If the right to rescind has been lost (by affirmation, lapse of time, restitution impossible, third party rights) then damages under section 2(2) of the Misrepresentation Act 1967 will not be available (Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745).

Although there is no right to damages for innocent misrepresentation, there is no harm in seeking to rescind a contract for innocent misrepresentation and also inviting the court to award damages in lieu of rescission in its discretion.

The burden of persuading the court to exercise its discretion to award damages is on the party seeking that it be exercised. This can be either claimant or defendant. Sometimes, damages are not the claimant's preferred remedy.

With innocent misrepresentation, in deciding whether to award damages in lieu of rescission, the court will look at the "nature of the misrepresentation" and "the loss that would be caused by it if the contract was upheld, as well as the loss that rescission would cause to the other party" (section 2(2), Misrepresentation Act 1967). The court's discretion under section 2(2) is, however, wide and other factors may play their part. For example, rescission of an insurance contract may be considered to be more important than the award of damages since it plays an important policing function.

In UCB Corporate Services Ltd v Thomason [2005] EWCA Civ 225, the Court of Appeal had to undertake this balancing exercise under section 2(2). It held that the bank was not entitled to damages under a guarantee agreement, even though the defendants had made misrepresentations that induced the bank to enter into a waiver of the guarantee. The claimant had not established any loss as a result of the misrepresentation.

The courts will not allow a party to make use of a relatively minor misrepresentation to rescind a contract (William Sindall plc v Cambridgeshire County Council [1994] 3 All ER 932).

Damages for innocent misrepresentation are awarded under section 2(2) of the Misrepresentation Act 1967 regardless of whether any contractual undertaking was given as to the accuracy of the representation.

Uncertainty exists as to the precise measure of damages for innocent misrepresentation. It is thought that subsection 2(2) is intended to give a lower measure of damages than the measure for negligent misrepresentation under subsection 2(1). Although the decision in William Sindall is authority for the proposition that under s2(2) of the Misrepresentation Act 1967 damages are limited by the contract rule of remoteness, it is thought that there is no reason for regarding damages under subsection 2(2) as being either tortious or contractual; subsection 2(2) would appear to apply a special measure of damages to compensate the claimant for the loss resulting from its inability to obtain rescission. (see McGregor on Damages (Sweet & Maxwell 19th ed. Ch. 47, paragraphs 47-069 to 47-077.)