Second-hand Goods Law | Free Contract Law Essay

Introduction

The House of Lords' decision in Shogun Finance Ltd v Hudson [2004] 1 A.C. 919 implicitly cautions against the risks associated with title 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. The three Lords, relying on Section 29(4) of the Hire Purchase Act, 1964 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. Therefore the initial contract was merely voidable.

Although 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. The position taken by the two dissenting Lords ignore the fact that the dealer only intended to deliver the goods to the person they in fact delivered them to because they were under a mistaken belief that he was the person with whom they had contracted with.

Brief Facts:

A fraudster approached Shogun Finance, a car dealership and aware that he would not survive a credit check for the hire purchase of a vehicle from Shogun provided a driver's licence falsely identifying him as Mr. Patel. After conducting a credit check on Mr. Patel Shogun agreed to the hire purchase and the fraudster provided the deposit by way of part cash and a check which was subsequently dishonoured. The fraudster then took possession of the car with arrangements for financing the balance. He subsequently sold the car to Mr. Hudson, the defendant. The plaintiffs then commenced an action against Mr. Hudson for wrongful conversion.

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. The position is less clear when mistakes as to identity of the parties to the contract occur. 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. The English law of contract with respect to mistake is blurred by equitable principles designed to preserve commercial bargains made in good faith.

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 provide as follows:

“(1) A Party may avoid a contract for mistake of fact or law existing when the contract was concluded if:

  • (i) the mistake was caused by information given by the other party; or

(ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or

(iii) the other party made the same mistake and

  • The other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms.”

Applying the principles enshrined in Article 4(103) it is difficult to argue that had Shogun, the plaintiff in this case had known that the fraudster was not in fact Mr. Patel they would have gone on to conclude the contract with the fraudster. Even if 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.” 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.

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Lord Millert however took the position 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 does not seem fair that he should be able to shift the burden of this risk on to the innocent third party.”

While this argument has merits it is inconsistent with 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. Moreover, fraudulent misrepresentation was described very broadly in Derry v Peek [1889] 14 AC 337 as any statement of fact:

“...made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true or false.”

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. 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 entitle to recover all his losses reasonable foreseen or not. 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. 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:

  • They intended to contract with another person;
  • The party that they contracted with was aware of that intention;
  • Identity was critical to the contract; and
  • Reasonable steps were taken to verify the other person's identity.

Each of these elements were substantiated to the satisfaction of the majority of the Lords in the Shogun case. Moreover, as previously discussed in the law of fraudulent misrepresentation permits such a contract to be voided.

The primary concern for the dissenting judges was the right of the third party to whom Mr. Patel sold the car which was the subject matter of the fraud. 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. However, the exception does not arise when the injured party under the original contract intended to contract with another party altogether.

Section 27 of the Hire Purchase Act 1964 provides that when a “motor vehicle” is purchased by virtue of a “hire-purchase agreement” and the 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.”

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 circumstances in Shogun's case. 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:

“It is little short of absurd that a subsequent purchaser's rights depend on the precise manner in which the crook seeks to persuade the owner of his creditworthiness and permit him to take the goods way with him. This ought not to be so. The purchaser's rights should not depend upon the precise form the crook's misrepresentation takes.”

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 the Shogun claim.

Lord Hobhouse quotes Section 29(4) as follows:

" the 'debtor' in relation to a motor vehicle which has been bailed .... under a hire-purchase agreement .... means the person who at the material time (whether the agreement has before that time been terminated or not) .... is .... the person to whom the vehicle is bailed .... under that agreement."

Lord 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”. The question essentially becomes whether or not the fraudster was a debtor under the hire-purchase agreement.

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.

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. 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. Moreover, the decision takes a position that ignores the fundamental principle of contract law with respect to the dynamics of the written contract with respect to identifying the intentions of the parties as well as the actual parties to the contract.

Moreover, the majority decision gave account for the original contract and the law with respect to enforcing that contract. The finance company in the Shogun case were left with no claim against Mr. Patel since the contract was negotiated in his name without his consent. Additionally the fraudster's name is not on the contract and was not an actual party to the contract. While Mr. Hudson, the defendant was left in a similar position, the risk he took was far less reasonable. 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.

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
  • Derry v Peek [1889] 14 AC 337
  • 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
  • Phillips v Brooks [1919] 2 KB 243
  • Shogun Finance Ltd v Hudson [2004] 1 A.C. 919
  • Wales v Wadham [1977] 1 WLR 199