Mistaken Identity in the House of Lords - Case Study Example

Introduction The House of Lords’ decision in Shogun Finance Ltd v Hudson [2004 A.C. 919 implicitly cautions against the risks associated with to the purchase of second-hand goods. The risk is not mitigated where the contract for sale is induced by virtue of fraudulent misrepresentation. There were two approaches open to the Lords in determining whether in such circumstances the contract for sale is voidable or void altogether. This was significant since it determined the outcome and the consequences for the innocent third party who purchased goods subject to a pre-existing contract induced by fraudulent misrepresentation. Lords Hobhouse, Philips and Walker took the position that the initial contract was void altogether so that the innocent third party lost the protection provided for by Section 27 of the Hire Purchase Act 1964.1 The three Lords, relying on Section 29(4) of the Hire Purchase Act, 19642 held that since the initial contract provided for the identities of the parties to the sale and the person to whom the goods had been delivered was not a party to the contract, that contract was void. Lords Millert and Nichols, dissenting, took an entirely different approach and asserted that the plaintiff delivered the goods to the person they mistakenly took to be a party to the contract, but was nevertheless the party with whom they intended to pass title to.3 Therefore the initial contract was merely voidable. The overall tone of the dissenting decision reflects a willingness to overcome doctrines of contract law in such a way as to avoid leaving two essentially duped and innocent victims of a fraudster pitted against one another with the result that the most disadvantaged victim is left with no claim. Although the arguments submitted by the dissenting justices raise questions of fairness and equity, the majority decision illustrates that overcoming that unfairness is not supported by tenets of contract law. The rulings of the majority of the Lords appear to take a severe position against the consumer who trades in second-hand goods, it makes practical sense, since the risks associated with these kinds of purchases can be avoided by purchasing goods from authorised dealers. This approach is not only consistent with principles of contract law, it is also consistent with common sense. Any person dealing in used or second-hand goods accepts certain risks, one of which is the risk of gaining bad title or no title at all. The position taken by the two dissenting Lords are too focused on consequences for the innocent parties and not focused on their respective conduct. Obviously, the third party was equally swayed by the fraudster that the he was in fact the person with whom he was trading. The only distinguishing factor was the expectations of both innocent parties. The third party, having failed to run a title search had no reasonable expectation that he was purchasing a car with free and clear title. On the other hand, the hire purchase company, haven been presented with an identification of the purchaser had no reasonable grounds to suspect the person they were dealing with was a fraudster. At the end of the day, the hire purchase company were mistaken whereas the third party was careless. It is therefore impossible to take issue with the majority view. The Law and Shogun v Hudson In English law a fundamental mistake can be critical to a contract but not always, because the question always turns on whether or not there was a meeting of minds.4 The position is less clear when mistakes as to identity of the parties to the contract occur.5 Essentially, in order for a mistake to render the contract void, it must be a fundamental mistake to the extent that it is operative and functioned to induce the contract.6 The English law of contract with respect to mistake is blurred by equitable principles designed to preserve commercial bargains made in good faith.7 It is immediately clear how one can easily question the essence of a commercial bargain and good faith when one purchases a used car, knowing full well that there is always a possibility that the title may not be free and clear. However, the question of good faith is less dubious when a hire purchase company relies on a credit check supported by identification. It is virtually impossible to distinguish the principles of fundamental mistake in the law of contract from principles of misrepresentation. For instance when one compares the definition and consequences of fraudulent misrepresentation to Article 4(103) of the Principles of European Contract Law, 1998 it is difficult to reconcile these tenets of law with the dissenting judgments in Shogun Finance v Hudson. Article 4(103) of the Principles of European Contract Law, 1998 allows for a contract to be avoided on the grounds of mistake if the mistake arose out of “information given by the other party” or that “other party knew of the mistake and that “it was contrary to good faith and fair dealing” or knew that the innocent party was mistaken and that the “other party knew” that had the innocent party been aware of the mistake they “would not have entered into the contract” or would have insisted on vastly different terms.8 Obviously, the innocent third party can not argue that he was mistaken since he took no steps to ascertain the title to the vehicle. If he had done so, he would have discovered that the title to the vehicle was not entirely cleared. Applying the principles enshrined in Article 4(103) it is difficult to argue that had Shogun, the plaintiff in this case known that the fraudster was not in fact Mr. Patel they would have gone on to conclude the contract with the fraudster. Moreover, the exceptions provided for in Article 4(103)(2) cannot be reasonably applied to the facts of the Shogun case. Article 4(103)(2) provides that in cases of fundamental mistake a party is not at liberty to “avoid the contract if” his or her mistake “was inexcusable” or “the risk of the mistake was assumed.”9 However, this part of Article 4(103) cannot be read in isolation. When read together with Article 4(103)(1) and the requirement of good faith, Article 4(103)(ii) will not excuse a party who specifically deals in bad faith, particularly one who makes a fraudulent representation for the sole purpose of inducing the innocent party into parting with goods under a contract for hire purchase. Clearly, a person who trades in used goods assumes “the risk of the mistake.”10 The same cannot be said of the hire purchase company who runs a credit check against an identification. The latter cannot be reasonably said to be assuming the risk that he is dealing with a fraudster. Lord Millert however took an approach that appears to invoke Article 4(103)(2) by adapting the position taken in Atiyah’s Introduction to the Law of Contract which argues that a person who parts with goods on the promise of a check submitted by a stranger assumes the risk and it is largely unfair to permit him to place “the burden” of the risk on “the innocent third party.”11 This argument has merits but it is inconsistent with the principles of fraudulent misrepresentation, a significant element of the Shogun case. In English contract law it is a firmly established principle that once fraud can be substantiated the innocent party who has been induced into a contract by virtue of fraud on the part of the other party the innocent party is entitled to rescind the contract.12 The plaintiff in the Shogun case, was induced by fraudulent misrepresentation to accept a check from the fraudster, trusting in the credit check conducted against a false identification. For all intents and purposes the check was not submitted by a mere stranger, as far as the plaintiff knew, but by someone who survived a credit check. The law of contract recognizes certain exceptions to the right to rescind a contract on the grounds of misrepresentation. In the Shogun case one exception arises, and that is circumstances in which an innocent third party acquires the property in question.13 This exception however cannot nullify the law’s intention that an injured party induced to part with property by virtue of fraudulent inducement under a contract is entitled to be placed in the position that he was in prior to the fraudulent misrepresentation. The injured party is entitled to recover all losses reasonably foreseen or not.14 The difficulty with the dissenting judgments is that they do not make an attempt to reconcile these diametrically opposed principles of law and focus too narrowly on the rights of the innocent third party with little if any regard for the rights of the injured party under the initial contract. The majority decision applied the ruling in Cundy v Lindsay [1878] 3 AC 459. It was held in this case that when one party makes a mistake identifying the other party rather than that party’s attributes, intending to contract with someone else altogether, and the other party is aware of this, the contract is void on the grounds of mistake.15 The dissenting judges took the position that if the contract is negotiated praesentes or in person, it is presumed that the mistaken party’s intention is to contract with the person present. In a typical case, the party claiming that the mistake is operative he or she is required to prove that: 1. They intended to contract with another person; 2. The party that they contracted with was aware of that intention; 3. Identity was critical to the contract; and 4. Reasonable steps were taken to verify the other person’s identity.16 Each of these elements were substantiated to the satisfaction of the majority of the Lords in the Shogun case. Moreover, as previously discussed the law of fraudulent misrepresentation permits such a contract to be voided. The dissenting judges were holding fast to principles in contract law that protect the right of the innocent third party and provides an exception to the right to rescind the contract generally voidable on the grounds of mistake or fraudulent misrepresentation.17 However, the exception does not arise when the injured party under the original contract intended to contract with another party altogether.18 Section 27 of the Hire Purchase Act 1964 provides that when a “motor vehicle” is purchased by virtue of a “hire-purchase agreement” and before the vehicle is “vested in the debtor” he passes the vehicle to “another person” and that other person buys the vehicle in good faith and does not have notice of the hire-purchase agreement: “...that disposition will have effect as if the creditor’s title to the vehicle has been vested in the debtor immediately before that disposition.”19 In recognising that there were two innocent injured parties in the Shogun case, Lord Nicholls argued in this dissenting judgment that Section 27 of the Hire Purchase Act 1964 provides protection for the injured third party who purchases a vehicle such as in the Shogun.20 Lord Nichols argued that attempting to discern whether or not the contract for the hire-purchase agreement was dependent upon whether or not the mistake was as to identity or attributes leads to an injustice. He added that it makes little sense to hinge the innocent third party’s rights on the “precise” methods used by the fraudster to induce the contract for hire purchase.21 While Lord Nicholl’s argument has merits it does not stand up against the common law position that pays high regard to a contract in writing. The courts have generally taken the position that the written contract provides the best evidence of the parties’ intention. Applying this tenet of contract law the majority decision held that the plaintiff had only intended to contract with Mr. Patel and not the fraudster. In applying these principles Section 29(4)of the Hire Purchase Act is relevant to the facts of Shogun.22 Lord Hobhouse maintained that under Section 29(4) the debtor is the person to whom the car “has been bailed” under the hire-purchase agreement. 23Lord Hobhouse went on to state that the relevant question for the court was the construction and application of Section 29(4) of the Hire Purchase Act 1964 “to the facts of the this case”.24 The question essentially becomes whether or not the fraudster was a debtor under the hire-purchase agreement.25 Taking this approach the majority Lords came to the conclusion that the fraudster was not a debtor within the meaning of the Hire Purchase Act, 1964. The name of the debtor was contained in the hire purchase agreement and that was the person with whom the plaintiff intended to contract with. As such the title to the vehicle never left the plaintiff since it the vehicle was sold to Mr. Patel. The only way in which Section 27 could have provided relief for the defendant Mr. Hudson, as an innocent third party, the purchase would have had to have been concluded with Mr. Patel.26 The difficulty for the law lords in the Shogun case was drawing a distinction between what constitutes the credit worthiness of the actual purchaser and what constitutes the actual details of the fraudster. The Shogun case did not only involve a mistake as to credit worthiness, and there in lies the difference. In King’s Norton Metal Co. Ltd. v Eldridge and Co. Ltd. (1897) 14 TLR 98 it was held that a mistake as to credit worthiness would not rise to such a level as to render a contract void.27 In the Shogun case it had gone beyond that. The credit check related to the person named in the contract rather than the person falsely holding himself out to be the party with whom the plaintiff intended to contract with. Conclusion The position taken by the dissenting judges in Shogun Finance v Hudson is far too protective of the injured third party who assumes the risk of purchasing a second-hand car when he or she could have easily purchased the vehicle from an authorized dealer. 28 Moreover, the decision takes a position that ignores the fundamental principle of contract law with respect to the dynamics of the written contract which clearly identifies the intentions of the actual parties to the contract. The plaintiff contracted with Mr. Patel and only Mr. Patel was capable of passing title to Mr. Hudson. While recognizing and upholding the original contract leaves both Mr. Hudson and Shogun with no real remedy against Mr. Patel, the risk taken by the defendant was far less reasonable than the risk taken by the plaintiff. He took the risk of purchasing from a virtual stranger with whom he had no real grounds to trust. The finance company on the other hand took a reasonable risk within the limits of fair commercial practice. In determining which party assumed the greater loss, it was only fair to look at the conduct of the parties and the extent to which that conduct could be excused. Bibliography Chandler, A., Devenney, J. and Poole, J. [2004] “Mistake as to Identity and the Threads of Objectivity.” Journal of Obligations and Remedies Vol. 3 No. 1, 7-22 Furmstan, M.P., Cheshire, G.C. and Fifoot, C.H.S.(2001) Furmstan, Cheshire and Fifoot’s Law of Contract. UK: LexisNexis Phang, A., Lee, P. And Koh, P. (2004) “Mistaken Identity in the House of Lords.” 63 CLJ 24 Smith, Stephen. (2006) Atiyah’s Introduction to Contract Law. Oxford: Oxford University Press Treitel, G.H. (2003) Treitel on the Law of Contracts. London: Sweet and Maxwell Table of Statutes Principles of European Contract Law, 1998 Hire Purchase Act 1964 Table of Cases Car and Universal Finance Co. Lts. V Caldwell [1961] 1 QB 525 Cundy v Lindsay [1878] 3 AC 459 Doyle v Olby (Ironmongers) Ltd. (1969) 2 QB 158 King’s Norton Metal Co. Ltd. v Eldridge and Co. Ltd. (1897) 14 TLR 98 Lake v Simmons [1927] AC 487 Lewis v Avery [1971] 3 All ER 907 Phillips v Brooks [1919] 2 KB 243 Shogun Finance Ltd v Hudson [2004] 1 A.C. 919 Wales v Wadham [1977] 1 WLR 199 Read More