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Shogun Finance Limited (Respondents) v Hudson (FC) Appellant
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OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Shogun Finance Limited (Respondents) v. Hudson (FC) Appellant ON WEDNESDAY 19 NOVEMBER 2003 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 LORDSOPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEShogun Finance Limited (Respondents) v. Hudson (FC) (Appellant)[2003] UKHL 62LORD 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 fraud-induced basis. There is a contract, but it may be avoided on discovery of the fraud. Fraudulent misrepresentation and identity 12. Fraudulent misrepresentations about a person's identity have to be considered against this background of legal principle. The factual postulate now under consideration, as mentioned at the outset, is that a crook (C) fraudulently misrepresents to the owner of goods (O) that he, C, is another identifiable person (X) whom O believes to be creditworthy. In reliance on this representation O agrees to sell the goods and he hands them over to C. Is this pursuant to a voidable contract between O and C? Or is there no contract between them at all? As between O and C the answer is of no moment. Either way O has ample remedies against C, assuming C has some money and can be traced. As already noted, however, the answer to these question may be of crucial importance to a third party who subsequently bought the goods in good faith from C. 13. In cases of this type there are two innocent parties, O and the third party purchaser. Striking the right balance when one of two innocent parties must sustain a loss is seldom easy. In 1960 Devlin LJ suggested that in this type of case the loss should be divided between O and the third party in such proportion as is just in all the circumstances: see Ingram v Little [1961] 1 QB 31, 73-74. Lord Gardiner LC then referred this problem to the Law Reform Committee. In its 12th Report 'Transfer of Title to Chattels' (1966, Cmnd 2958) the committee rejected Devlin LJ's apportionment suggestion as impracticable. The committee recommended that where goods are sold under a mistake as to the buyer's identity the contract should, so far as third parties are concerned, be voidable and not void: paragraphs 9-12 and 15. 14. Parliament did not implement this recommendation. Instead the Sale of Goods Act 1979 re-enacted the relevant law in much the same terms as the Sale of Goods Act 1893. In general, proprietary rights of an owner of goods endure against a third party who buys them in good faith from a thief. That is the effect of section 21(1). But there are statutory exceptions in some cases where the owner of goods parted with his goods consensually. The third party may acquire a good title if C, who purported to sell the goods to him, had a voidable title: section 23. Or if C had agreed to buy the goods from O and was in possession of the goods with O's consent: section 25. Additionally, section 27 of the Hire-Purchase Act 1964 made a limited exception for the protection of purchasers of motor vehicles. Section 27 of the Hire-Purchase Act 1964, as substituted by the Consumer Credit Act 1974, provides:
'Creditor' means the person by whom goods are bailed under a hire-purchase agreement, and 'debtor' means the person to whom a motor vehicle is bailed under such an agreement: section 29(1), (4). The proceedings 15. The present case concerns this latter exception. The crucial issue is whether Norman Hudson, who bought a Mitsubishi Shogun SWB motor car from a crook who promptly disappeared, can bring himself within section 27 of the Hire-Purchase Act 1964. Mr Hudson was a private purchaser who bought the vehicle in good faith. His right to retain this vehicle depends upon whether he can establish that the crook acquired possession of the vehicle under the written hire-purchase agreement which on its face was made between the finance company, Shogun Finance Ltd, and a Mr Durlabh Patel. When signing this agreement the crook pretended to be Mr Durlabh Patel, living at an address in Leicester. As proof of his identity the crook produced Mr Patel's driving licence which he had obtained improperly. The finance company checked Mr Patel's credit rating. Finding this to be satisfactory the finance company instructed the motor dealer who had been dealing with the crook to let the crook have the car. Mr Patel knew nothing about any of these goings on. 16. If Mr Hudson is to bring himself within section 27 of the Hire-Purchase Act 1964 he must establish that possession of the car obtained by the crook in this way was under a hire-purchase agreement made between him, the crook, and Shogun Finance. There is of course no question of an agreement between Mr. Patel and Shogun Finance. At the trial the judge, assistant recorder D E B Grant sitting in the Leicester County Court, held that Mr Hudson failed to do so. He gave judgment for Shogun Finance in the amount of £18,374. 17. The majority of the Court of Appeal, Brooke and Dyson LJJ, agreed with the judge's decision: see [2002] QB 834. Brooke LJ said the hire-purchase agreement, if made between anyone, was made between the finance company and Mr Patel. The finance company did not make the agreement with anyone else. Dyson LJ held that section 27 of the Hire Purchase Act 1964 did not avail Mr Hudson because the crook was not the hirer named in the written hire-purchase agreement and therefore he was not the debtor under the agreement. Sedley LJ dissented. The finance company, using the dealer as its agent, had in law contracted face to face with a fraudsman in circumstances insufficient to rebut the presumption that it was with him, and not with the person he claimed to be, that the company was contracting. Fraudulent misrepresentation: face to face dealings 18. I can now turn to the effect of a fraudulent misrepresentation made by a person about his identity. In cases of face to face dealings the law, as declared by the preponderance of authority, is tolerably clear. The owner of the goods believes the person in front of him is X, and in that belief he contracts with the person in front of him. The fraudulent misrepresentation by the crook C regarding his identity no more negatives O's intention to contract with C than, in my earlier example, the seller's misrepresentation about the identity of the proffered goods negatives the buyer's intention to buy the proffered goods. In each case the relevant intention is to be ascertained by looking at the position which, as a result of the misrepresentation, the other party believes to exist. On that footing there is consensus, in the relevant respect, between the parties. O believes C, the person in front of him, to be X and he deals with C in that belief. The fraud entitles O to avoid the contract, but it does not negative the formation of a contract with C. 19. Thus in Phillips v Brooks Ltd [1919] 2 KB 243 Horridge J held that the jeweller contracted to sell the ring to the crook in the shop who represented he was Sir George Bullough. The jeweller had heard of Sir George Bullough and checked he lived at the address given. The jeweller gave evidence he had no intention of making any contract with any person other than Sir George Bullough. Horridge J rightly analysed what that meant by adopting a passage from the judgment of Morton CJ in the Massachusetts case of Edmunds v Merchants' Despatch Transportation Co 135 Mass 283, 283-284:
20. In Ingram v Little [1961] 1 QB 31, another 'face to face' case, the majority of the Court of Appeal reached the contrary conclusion. A crook responded to an advertisement for a car and fraudulently introduced himself as P G M Hutchinson living at a stated address in Caterham. The owners of the car checked in the telephone directory there was a person of that name living at that address. The crook paid for the car with a cheque made out in his assumed name. Sellers and Pearce L JJ held that the owners did not enter into a contract with the crook. Sellers LJ considered the offer made by the owners of the car was capable of acceptance only by the honest P G M Hutchinson of Caterham. Pearce LJ considered that whether a party was not contracting with the physical person to whom he uttered the offer but with another individual whom he believed to be the person physically present was a question of fact. 21. Devlin LJ disagreed. He pointed out, at p 65:
22. Devlin LJ suggested, at p 66, that to deal with this difficulty the law should formulate a presumption that a person is intending to contract with the person to whom he is actually addressing the words of contract. That should be the starting point. Devlin LJ stressed that the presumption could not be rebutted by piling up evidence that Miss Ingram would never have contracted with the person in front of her unless she had thought him to be P G M Hutchinson. There was everything to show that Miss Ingram would never have accepted the crook's offer if she had known the truth, but nothing to rebut 'the ordinary presumption' that she was addressing her acceptance, 'in law as well as in fact', to the person to whom she was speaking. 23. The majority decision in Ingram v Little [1961] 1 QB 31 was doubted when the same problem came before a differently constituted Court of Appeal ten years later, in Lewis v Averay [1972] 1 QB 198. The court comprised Lord Denning MR, Phillimore and Megaw LJJ. In the Lewis case a crook represented orally to the owner of a car that he was a well known actor, Richard Greene. Lord Denning MR, characteristically, enunciated a broad proposition: mistake as to identity renders an apparent contract voidable, not void. In this type of case the third party knew nothing of what passed between the seller and the rogue and he acted with complete circumspection and in good faith. It was the seller who let the rogue have the goods and thus enabled him to commit the fraud on the third party. Phillimore LJ, at p 208, considered there was nothing to displace the prima facie presumption that the car owner was dealing with the person present in the flat, the rogue: 'this case really is on all fours with Phillips v Brooks which has been good law for over 50 years'. Megaw LJ, at p 209, based his decision on the ground that the mistake of the owner of the car went no further than a mistake as to the attributes of the rogue: it 'was simply a mistake as to the creditworthiness of the man who was there present and who described himself as Mr Green'. 24. Sometimes in these cases the transaction is evidenced in writing. This can make no difference to the outcome. Clearly there is no magic attaching to a misrepresentation made in writing rather than by word of mouth. The presence or absence of a written record of a transaction negotiated face to face, such as an invoice or receipt made out in favour of Sir George Bullough, with or without his address, or a cheque ostensibly signed by Sir George Bullough, is neither here nor there for present purposes. Writings such as these are no more than stark contemporary confirmation that the misrepresentation was made and that the seller believed it. 25. Similarly the contractual position between O and C must be the same if they meet face to face and the deal arranged by them is later embodied in a written agreement. This further step does not relevantly change the legal position. The written contract is expressed to be made between O and X. But C, the person with whom O was physically dealing, asserted he was X, and O believed him. So the description of C in the contract as X was a fraudulent misnomer. C used a false name and address, and the written contract is to be construed accordingly. Fraudulent misrepresentation: dealing by correspondence 26. But what of the case where a fraudulent misrepresentation is made in writing but O and C do not meet each other? C writes to O saying he is X and the deal proceeds on that basis. O parts with his goods to the person with whom he is in fact dealing, namely, C, in the belief he is X. 27. At first sight it seems counter-intuitive to speak of a contract between O and C in cases of this type. It seems counter-intuitive because on its face a contract in writing or in correspondence expressed to be made between O and X is inconsistent, agency apart, with its being a contract between O and C. But this intuitive response is not a sound guide if it leaves out of account, as all too easily it may, the vitally important underlying fraudulent misrepresentation. In his dealings with O the crook C represented he was X, and O proceeded to deal with him (C) in that belief. 28. When this feature is kept in mind it readily becomes apparent that in principle cases of this type are no different from cases of face to face dealings. The existence of physical immediacy in one case, and the absence of it in the other, is immaterial. The physical immediacy of C in face to face cases tends to emphasise O's intention to deal with the person in front of him. With other forms of communication such as the telephone or correspondence this physical immediacy is lacking. But in each case, whatever the mode of communication, what matters is whether O agreed to sell his goods to the person with whom he was dealing, not why he did so or under what name. The latter is relevant to remedy, not to formation of a contract. 29. In this regard mention must be made of reasoning sometimes advanced here, along the lines that the identity of the person to whom a written offer is made is a question solely of construction of the document. The offer, it is said, is made to the person identified in the document and no one else. A written offer made by O to X is not capable of acceptance by C. Hence, it is said that, whatever the position in face to face dealings, in cases of written contracts or contracts made by correspondence there can be no contract between O and C, contradicting as this would the terms of the document. 30. The flaw in this reasoning is that it begs the crucial question: to whom was the offer made? The reasoning assumes this is a straightforward case of an offer made to the person named. Indeed the person named is X. But that is only part of the picture. O believes that X, the person to whom he is writing and to whom he addressed the offer, is one and the same person as the person with whom he is dealing. In fact he is not dealing with X. He is dealing with C. O's misapprehension in this regard, induced by C's fraud, is no different in principle from a case where C's misrepresentation is made orally in the course of the face to face meeting. The legal problem is the same in both cases. The presence or absence of writing does not constitute a principled ground of distinction. 31. Thus, when Lindsay & Co supplied linen handkerchiefs in response to a written order they were under a misapprehension regarding the identity of the person placing the order in the same way as the jeweller in the shop was under a misapprehension regarding the identity of his customer ('I am Sir George Bullough') in Phillips v Brooks Ltd [1919] 2 KB 243. If the approach adopted in Phillips v Brooks is correct, Lindsay's misapprehension no more negatived the formation of a contract with the person placing the written order for handkerchiefs than did the like misapprehension by the jeweller in the case of Phillips v Brooks. The jeweller parted with his ring to the customer in his shop. Lindsay parted with their linen by sending it to the address supplied by the crook. On what terms? The answer must be, on the terms agreed between Lindsay and the person with whom they were dealing. That was a contract Lindsay could enforce, should they have wished, or repudiate on the grounds of fraudulent misrepresentation. |
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