Thomas Witter Ltd v TBP Industries Ltd


[1996] 2 All ER 575

Chancery Division


Thomas Witter Ltd purchased a carpet manufacturing business from TBP Industries Ltd. During negotiations for the sale of the business TBP presented TW with audited and management accounts for 1988 and stated that estimated profits for 1989 would be £750,000 to £760,000. TBP also presented TW with a sight of the October 1989 management accounts and indicated that they were prepared on the same basis as the audited accounts but included a special one-off expense of £120,000 because of problems with carpets supplied to one customer. On the basis of these and other representations from TBP to TW, TW purchased the business for £4m.


TW issued a writ against TBP claiming rescission of an agreement between them or alternatively damages pursuant to s.2(2) of the Misrepresentation Act 1967 or for misrepresentation inducing TW to enter into the agreement, alternatively damages for fraudulent or negligent misrepresentation, or alternatively damages for breach of the agreement. TW claimed that TBP had misrepresented the accounts by


1. stating that they included the special one-off expense of £120,000 (from which it was to be implied that the underlying or maintainable profits would be higher) when the actual amount of that expense was no more than £50,000, and


2. by not disclosing that they included deferred pattern book expenditure, which had the effect of decreasing the profit figure on which TW had made their offer.


TBP claimed that the contract of sale included 1. an 'entire agreement' clause whereby TW acknowledged that it had not been induced to enter into the agreement by any representation or warranty, and 2. a contractual limitation clause which stated that TBP would not be liable for a breach of the agreement or a claim in respect of a warranty.


Jacob J




(b) The legal test for fraudulent misrepresentation


First then deceit. Mr Mann QC [counsel for TW] relied upon part of the classic speech of Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 375-376, [1886-90] All ER Rep 1 at 22-23:


'The ground upon which an alleged belief was founded is a most important test of its reality. I can conceive many cases where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the Court that it was not really entertained, and that the representation was a fraudulent one. So, too . . . if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.'


He further submitted that where a person has made a representation of fact and, before the contract is concluded, comes to learn of its falseness, that person comes under a duty to correct the representation and, if he fails to do so, then is taken to be fraudulent. Mr Mann relied upon the speech of Lord Blackburn in Brownlie v Campbell (1880) 5 App Cas 925 at 950:


'I quite agree in this, that whenever a man in order to induce a contract says that which is in his knowledge untrue with the intention to mislead the other side, and induce them to enter into the contract, that is downright fraud; in plain English, and Scotch also, it is a downright lie told to induce the other party to act upon it, and it should of course be treated as such. I further agree in this: that when a statement or representation has been made in the bona fide belief that it is true, and the party who has made it afterwards comes to find out that it is untrue, and discovers what he should have said, he can no longer honestly keep up that silence on the subject after that has come to his knowledge, thereby allowing the other party to go on, and still more, inducing him to go on, upon a statement which was honestly made at the time when it was made, but which he has not now retracted when he has become aware that it can be no longer honestly persevered in. That would be fraud too, I should say, as at present advised.'


This argument related to the changed basis of profit forecast point. It was argued that Mr Simpson, having given to Mr Puri profit forecasts on one basis of pattern book expenditure, knew his later forecast was on a different basis and should be taken as fraudulent for not disclosing that fact.


In my judgment Mr Mann's argument is wrong in law. He takes the reference to 'recklessness' out of context -- divorcing it from the heart of the tort of deceit, namely dishonesty. One only has to read earlier in the speech of Lord Herschell to see that this is so:


'. . . there has always been present, and regarded as an essential element, that the deception was wilful either because the untrue statement was known to be untrue, or because belief in it was asserted without such belief existing . . . I cannot assent to the doctrine that a false statement made through carelessness, and which ought to have been known to be untrue, of itself renders the person who makes it liable to an action for deceit.' (See (1889) 14 App Cas 337 at 369, 373, [1886-90] All ER Rep 1 at 19, 21.)


(c) Findings of fact in relation to fraudulent misrepresentation


So what I have to decide is whether Mr Simpson or Mr Lloyd deliberately set out to mislead Mr Puri, not by a deliberate untruth (for that is not alleged) but by its equivalent, such recklessness as to amount to a disregard for the truth. I have no difficulty in acquitting these witnesses of any such intent. I must explain why.


So far as pattern book expenditure deferrals in the October management accounts are concerned, I accept Mr Simpson's evidence that he did not know of these right up until the time of the contract. Nor did Mr Lloyd. By the time of the contract both thought that until November pattern book expenditure was written off as it was incurred. No one had ever suggested that the management accounts sometimes had ad hoc deferrals for 'smoothing' purposes.


In relation to the Allied problem the facts are broadly these... The point does not matter, because it is clear that by the time of the contract the representation had been defined as set out in the disclosure letter, namely £120,000 charged to the September and October accounts.


What does matter is whether Mr Simpson was so reckless in the estimate that he should be regarded as fraudulent. He says he was given the figure of £120,000 by Mr Hogarth as a 'fag packet' calculation at a Witter board meeting on 21 November. Mr Hogarth has no recollection whatever of the cost of the Allied problem being discussed. There appears never to have been a detailed estimate of the figure being worked out. Now I accept Mr Simpson's evidence that he got a rough estimate from Mr Hogarth. It was obviously important. So I think he was negligent not to get a proper estimate, or to tell Mr Puri that he had not got a proper estimate. But it was not dishonest of him to give that rough estimate to Mr Puri. He believed it, but knowing there was no proper check, his belief was not reasonable.


(d) Rescission


Mr Mann tied his claim to rescission to the claim in fraud. I never was quite sure why, since rescission is available also for innocent misrepresentation. Even if I had found fraud, however, I would not have granted rescission. This remedy is not available where it is not possible to restore the parties to their position before the contract. Although Melton Medes kept the Witter business separate, it is unrealistic to regard it as the same as the business conveyed. There have been numerous changes to staff and personnel (including the departure of Mr Francis who had exceptional sales skills). Those personnel who have stayed have been in different pension schemes, there are mortgagees of the business and so on. Time has moved on and third parties would, I think, be affected...


(e) Innocent and negligent misrepresentation: s 2 of the 1967 Act


The 1967 Act essentially widened the remedies available. By s 1 it was made clear that the remedies are available even if the misrepresentation has become a term of the contract (a point doubtful before) or if the contract has been performed. By s 2 a remedy in damages was created, both for negligent and non-negligent misrepresentation. As a result it now seldom matters whether a misrepresentation is made fraudulently or not: the 1967 Act confers substantial remedies in respect of non-fraudulent misrepresentation. The principal difference may now lie in relation to clauses attempting to exclude liability for misrepresentation -- a matter I consider below.


I turn to the provisions concerned. Section 2 provides...


Both ss 2(1) and 2(2) provide for damages for misrepresentation. Section 2(1) provides a defence for the misrepresentor -- a defence which I shall for brevity call 'innocence' but which involves proof of belief and reasonable grounds for belief that the representation was true. Thus, it is sometimes said that s 2(1) relates to 'negligent' misrepresentation in the sense that it has the 'innocence' defence. Section 2(2) provides no such defence. However, damages are only available 'in lieu of rescission'.


The defendants here argued that they had a defence of innocence both in relation to pattern book expenditure and in relation to the Allied problem, and so escaped s 2(1). I reject that on the facts... But even if the 'innocence defence' applies, then s 2(2) comes into play. Mr Kaye argued that it could not do so because rescission is no longer available. He argued that the discretion under s 2(2) to award damages crucially depends upon the rescission remedy remaining extant at the time the court comes to consider the question. Whether that argument is right has been a moot point since the Act was passed. The leading article of the time, Atiyah and Treitel 'Misrepresentation Act 1967' [1967] MLR 369, noticed the point at once. I found the argument unattractive: rescission might or might not be available at the time of trial depending on a host of factors which have nothing to do with behaviour of either party. I was not surprised to find that the authors of Chitty on Contracts (27th edn, 1994) para 6-058, p 372 found the suggested construction 'strange' even though Mustill J had apparently accepted it obiter in Atlantic Lines and Navigation Co Inc v Hallam Ltd, The Lucy [1983] 1 Lloyd's Rep 188 and one of the plaintiffs conceded it in Alman v Associated Newspapers Ltd (20 June 1980, unreported).


The argument assumes that the Act is referring to the remedy of 'rescission', though this is not clear. If it were only the remedy referred to then it is difficult to understand the reference to 'has been rescinded' in the section. It seemed to me that the reference might well be to a claim by the representee that he was entitled to rescission, in which case it would be enough for the court to find that the agreement was 'rescissionable' at least by the date when the representee first claimed rescission or at any time. There was enough ambiguity here to look to see what was said in Parliament at the time of the passing of the Act, pursuant to the limited new-found freedom given by Pepper (Inspector of Taxes) v Hart [1993] 1 All ER 42, [1993] AC 593. Mr Foxton found what the Solicitor General of the time said in the House of Commons. Even though it was against his and Mr Kaye's case, in the usual fine tradition of the Bar, he drew it to my attention. The Solicitor General said (741 HC Official Report (5th series) cols 1388-1389, 20 February 1967):


'. . . the hon. Gentleman put to me the case of the sale of a house. He asked me to suppose that there had been the sale of a house, some defect was discovered afterwards, it might be that a third party had come into the matter, and it might be entirely unjust or inequitable to insist on rescission in such a case. I suggest that in such a case, as the Lord Chancellor said, the conveyance is unlikely to be rescinded because of the impossibility of restitution. My answer is that a case of that sort would be covered by Clause 2(2) which says [here the material words of the present section were read]. That is the option which is given to the court, and in the sort of case which has been put to me . . . it would follow that the court or arbitrator would almost certainly award damages in lieu of rescission. Therefore that matter is really fully covered.'


So the Solicitor General told the House of Commons that it was his view that damages could be awarded under s 2(2) when there was an impossibility of restitution. Accordingly, I hold that the power to award damages under s 2(2) does not depend upon an extant right to rescission -- it only depends upon a right having existed in the past. Whether it depends upon such a right existing at any time, or depends upon such a right subsisting at the time when the representee first claims rescission, I do not have to decide. It was here first claimed by letter of 25 April 1990 which is only some four months from the contract date. In principle, however, I would have thought that it is enough that at any time a right to rescind subsisted. It is damages in lieu of that right (even if barred by later events or lapse of time) which can be awarded.


Given that construction of s 2(2), it may be asked: what is the difference between s 2(2) and s 2(1)? In particular, since s 2(1) has a defence of 'innocence' is that in practical terms useless because damages can be had under s 2(2)? There is, of course, overlap between the two subsections on any construction, and s 2(3) explicitly recognises this. But if my construction covered all the cases covered by s 2(1) then the latter would be pointless and my construction would probably be wrong. However, I do not think there is complete overlap. First, under s 2(1) damages can be awarded in addition to rescission. So if there is 'innocence' the representor cannot have both remedies and never could, whatever the date of the decision. Secondly, the question of an award of damages under s 2(2) is discretionary and the court must take into account the matters referred to in the concluding words of the subsection. Thirdly, the measure of damages under the two subsections may be different -- s 2(3) certainly contemplates that this may be so and moreover contemplates that s 2(1) damages may be more than s 2(2) damages and not the other way round. It is fair to say, as Chitty para 6-059, p 373 observes, that 'the Act gives little clue as to how damages are to be assessed under this subsection if they are not to be assessed in the same way as under subsection (1)'. However both Chitty and Treitel Law of Contract (8th edn, 1991) p 326 (see also Atiyah and Treitel [1967] MLR 369 at 376) suggest that damages under s 2(2) may be limited to the loss in value of what is bought under the contract whereas s 2(1) damages may also include consequential loss.


I reach my conclusions under s 2(2) without misgivings: as between the person making the innocent misrepresentation and his misrepresentee, the 'merits' favour the latter. The constant and justified academic criticism of the Act indicates a subject well worth the attention of the Law Commission. Fortunately, so far as I am concerned, in the circumstances of this case there can be no difference between the two subsections, for no consequential loss is claimed.


(f) Findings in relation to non-fraudulent misrepresentation


The misrepresentations are said to be: (i) that the basis of all profit forecasts and budget estimates given to Mr Puri orally and in writing are the same, namely that pattern book expenditure was written off as incurred; (ii) that there were no deferrals in the October management accounts; (iii) that the Allied problem cost £120,000 charged to the September/October accounts and was non-recurring...


... I think all of these were made out...


Moreover, I hold that these misrepresentations were negligently made or continued down to the date of the contract. By 'negligent' I mean that the defendants have failed to satisfy me of the proviso to s 2(1). I turn to consider this further.


(j) The effect of the 'whole agreement' clause, cl 17.2


Clause 17.2 of the contract provides:


'This Agreement sets forth the entire agreement and understanding between the parties or any of them in connection with the Business and the sale and purchase described herein. In particular, but without prejudice to the generality of the foregoing, the Purchaser acknowledges that it has not been induced to enter into this Agreement by any representation or warranty other than the statements contained or referred to in Schedule 6.'


The defendants say this prevents any liability for misrepresentation. A similar clause was relied upon in Alman v Associated Newspapers Ltd (20 June 1980, unreported). In that case the clause provided simply that the written contract constitutes 'the entire agreement and understanding between the parties'. Browne-Wilkinson J held the clause was ineffective to exclude liability for misrepresentation. It did not refer to pre-contract representations. He suggested, obiter, that a clause acknowledging that the parties had not relied on any representations in entering the contract would do. That suggestion is apparently the basis of the second sentence of the present clause.


The first thing to do is to construe the clause. As in the Alman case, in my judgment the first sentence does not operate to exclude remedies for pre-contractual misrepresentations. It simply does not say it does. If it said, for instance, 'The vendor agrees that he will have no remedy in respect of any untrue statement made to him upon which he relied in entering this contract and that his only remedies can be for breach of contract' the clause would probably have done the job. Then, if he is sold a pup, he will have no remedy unless it is a contractually warranted pup (I here gratefully adapt the language of Shaw LJ in Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5 at 26, [1976] QB 801 at 832). Unless it is manifestly made clear that a purchaser has agreed only to have a remedy for breach of warranty I am not disposed to think that a contractual term said to have this effect by a roundabout route does indeed do so. In other words, if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting his liability for falsehoods he may have told.


I am reinforced in my view by the second sentence. This by clear implication suggests positively that the purchaser was induced to enter into the contract by any representation contained in or referred to in schedule 6. Now schedule 6 contains a cl 11.1, which reads:


'All statements of fact made in the Disclosure Letter (but not including the Disclosed Documents as defined therein) are true and accurate in all material respects and are not misleading in any material respect (including by reason of any omissions therefrom).'


So any representation of fact in that letter is referred to in schedule 6, and, if untrue, can found a misrepresentation.


I should add that I was much pressed by the practice of solicitors in relation to this type of clause. I was referred to a number of textbooks on company acquisition where learned authors comment on clauses intended to exclude liability for misrepresentation and what the authors perceive as their general desirability...


To my mind, if those clauses are intended to exclude liability for misrepresentation if that misrepresentation has become a warranty of the agreement, they are ineffective. Section 1 of the Misrepresentation Act 1967 specifically deals with this. It reads:


'Where a person has entered into a contract after a misrepresentation has been made to him, and -- (a) the misrepresentation has become a term of the contract; or (b) the contract has been performed; or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Act, notwithstanding the matters mentioned in paragraphs (a) and (b) of this section.'


The authors do not mention this provision in their discussion of this type of clause. I think that where a man has been sold a pup, even if it is a warranted pup, there is nothing, unless the contract expressly says so, from the man also treating it as a misrepresented pup, if that was indeed the case. What he relied upon is a question of fact...


(k) Section 3 of the 1967 Act and the 1977 Act


Even if I were wrong on the meaning of cl 17.2 and it does have the purported effect of excluding liability or remedies for misrepresentation, it bumps into s 3 of the 1967 Act, as substituted by s 8 of the 1977 Act. This provides:


'If a contract contains a term which would exclude or restrict -- (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.'


Section 11(1) of the 1977 Act defines the requirement of reasonableness as follows:


'In relation to a contract term, the requirement of reasonableness for the purposes of . . . section 3 of the Misrepresentation Act 1967 . . . is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.'


This makes it plain that the test is retrospective -- was the term reasonable at the time? Mr Kaye urged that a clause excluding liability for misrepresentation was in widespread use and was therefore to be considered reasonable. He relied upon the views of the authors I have mentioned and evidence from the defendants' solicitor to establish that such clauses were indeed in common use. I note that Browne-Wilkinson J in Alman's case found as a fact that skilful and reputable solicitors commonly include clauses of the type he was considering in share purchase agreements and I make the same finding in relation to cl 17.2 here.


But I have to say that even if cl 17.2 had exclusionary effect it would to my mind be neither fair nor reasonable. The problem is its scope. The 1967 Act calls for consideration of the term as such. And it refers to 'any liability' and 'any misrepresentation'. It does not call for consideration of the term so far as it applies to the misrepresentation in question or the kind of misrepresentation in question. The term is not severable: it is either reasonable as a whole or not. So one must consider its every potential effect. The clause does not distinguish between fraudulent, negligent, or innocent misrepresentation. If it excludes liability for one kind of misrepresentation it does so for all. I cannot think it reasonable to exclude liability for fraudulent misrepresentation -- indeed Mr Kaye accepted it would not work in the case of fraud. It may well be, with a different clause, reasonable to exclude liability for innocent misrepresentation or even negligent misrepresentation. But since the width of this clause is too great I would have held it failed the requirement of reasonableness and so was of no effect.


A possible route around this latter objection would be to construe the clause so that it did not apply to a fraudulent misrepresentation. This approach is artificial. It is unnecessary now that the 1977 Act exists to destroy unreasonable exclusion clauses. The construction involves creating an implied exception in the case of fraud. What about an implied exclusion of negligence? Or gross negligence? It is not for the law to fudge a way for an exclusion clause to be valid. If a party wants to exclude liability for certain sorts of misrepresentations, it must spell those sorts out clearly.


(l) Overall effect of misrepresentation


In the result I conclude as follows. The October management accounts gave a figure of profit for the year to date of £499,000. It contained undisclosed deferrals of pattern book expenditure of £120,000. There was a misrepresentation in respect of the true cost of Allied, represented to be a one-off, now solved, problem. It was said to be £120,000 when in fact it was about £50,000, an overstatement of £70,000.