England and Wales High Court (Technology and Construction Court) Decisions

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Cite as: [1999] EWHC Technology 183

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Floods of Queensferry Ltd, David Charles Flood v. Shand Constructions Ltd, Morrison Shand Constructions Ltd, Morrison Construction Ltd [1999] EWHC Technology 183 (17th December, 1999)

Case No: 1994 ORB 826

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

HIS HONOUR JUDGE HUMPHREY LLOYD QC

B E T W E E N:

	FLOODS OF QUEENSFERRY LIMITED	First Claimant
	-and-
	DAVID CHARLES FLOOD	Second Claimant
	-and-
	SHAND CONSTRUCTION LIMITED	First Defendant
	-and-
	MORRISON SHAND CONSTRUCTION LIMITED	Second Defendant
	-and-
	MORRISON CONSTRUCTION LIMITED	Third Defendant

Case No: 1994 ORB 826
Date: 17 December 1999

1. Judgment in the earlier part of the action was given on 31 March 1999. This section concerned the first claimant's claim for damages for misrepresentation under section 2(2) of the Misrepresentation Act 1967 on the grounds that it had been induced to contract as a result of misrepresentations made by the first defendant. For reasons which appear from the judgment it was held (amongst other things) that no misrepresentation was made which induced the contract and that even if there had been such a misrepresentation damages would not have been recoverable as rescission was not available and for other reasons, including the avoidance of loss by the issue of credit notes by the claimant.

Andrew R Nicol appeared for the first claimant, instructed by Rowe & Maw.
Colin Reese QC and Chantal-Aimée Doerries appeared for the defendants, instructed by McGrigor Donald.

The following is the text of the judgment approved by the judge subject to editorial corrections.

JUDGMENT

1. In my judgment of 31 March 1999 I recorded that some claims were not dealt with, including the present claim. It is made under section 2(2) of the Misrepresentation Act 1967. The first claimant, Floods of Queensferry Ltd (FOQ) says that it had been induced to enter into the sub-contract as a result of misrepresentations made by the first defendant, Shand Construction Ltd (SCL). I shall not repeat what I set out in that judgment except in so far as it may be necessary for the purposes of the questions with which I have to deal. Accordingly I shall only set out a limited number of background facts.

2. FOQ's case is that it had entered into a contract with SCL (which was executed in October 1992) having been induced to do so by two misrepresentations of fact, namely, that SCL was the main contractor and that it was actively trading. FOQ's case on liability is set out in paragraphs 9 - 10, 11 and 18 of its statement of claim. In a substituted schedule 5 (for which permission was granted on 16 June 1999) FOQ maintaincheck text ex sched 5 that "had it not been for the said misrepresentations FOQ would not have entered into the sub-contract; alternatively, by reason of the said misrepresentation FOQ lost the chance to re-negotiate the sub-contract on more favourable terms". Its financial claim was then presented on the basis that in the judgment of 31 March 1999 it was awarded Ł1,046,018.98 before the deduction of sums paid on account and the addition of interest. Its actual costs, as found by me, came to Ł1,115,343.55. In addition it claims off-site costs of 10% i.e. Ł111,534.36. Its claim is therefore for the difference between the costs it maintains were incurred and the amount to which it is entitled under the sub-contract, namely a figure of Ł180,858.93. In the alternative to the claim for 10% for off-site costs FOQ claim Ł112,500 which is apparently the rounded up figure to which I referred in paragraph 299 of my judgment which is in reality a reference to the total of Mr Wallis's calculations.

3. The facts relevant to FOQ's case begin in 1990 when the SCL was part of the Morrison Group which had been formed a little earlier as a result of a management buy-out and the acquisition of SCL from the Shand Group. In the latter part of 1990 consideration was given to re-organising the Morrison Group including the building and civil engineering operations of SCL and Morrison Construction Limited (MCL). Advice was obtained from Coopers & Lybrand, the Group's accountants and auditors. In a letter of 12 October 1990 addressed to Sir A F Morrison, the managing director, Coopers & Lybrand recorded their

2. "understanding is that the following main objectives were to be achieved from the proposed re-organisation:

3. (a) Two new companies, Morrison Building Limited and Morrison Civil Engineering Limited would disclose the results of the buildings and civil engineering operations in their respective statutory accounts.

4. (b) For marketing reasons the existing companies Shand Construction Limited and Morrison Construction Limited were to be seen to be continuing to trade.

5. I understand that it is felt that the Shand name should be retained in England in view of the goodwill which attaches to it and also the possible detrimental effect of a name change following so soon after buy-out from Charter".

6. The writer then set out certain options including option "D". This included:

7. "In such cases the legal position in that the companies formerly owning the trades (the agency companies in this case, Morrison Construction Limited and Shand Construction Limited) should not be regarded as having become dormant but as acting as management agents for the trading companies (ie Morrison Building Limited and Morrison Civil Engineering Limited) and carry on the trades in their own names but on behalf of and for the account of the trading companies.

8. We have been advised that provided the conditions set out below are reserved there is no need for the agency company to keep books of account to record any of the transactions relating to the trade which may be recorded in the books of the trading companies. We have also been advised that the agency companies need not prepare a profit and loss account provided that they receive no remuneration for their services and have no other receipts or payments for their own accounts. The conditions to be observed are:

9. (a) The arrangements should be recorded in a formal agreement. (I have attached a specimen). I would recommend however that your solicitor should be involved in drawing up the final agreement.

10. (b) There should be a note in the accounts of Shand Construction and Morrison Construction in one of the two following forms:

11. (i) The company has not traded on its own account and has made neither profits nor losses.

12. (ii) All trading transactions are entered into as agents for Morrison Building Limited and Morrison Civil Engineering Limited, the records thereof being incorporated in the books and accounts of those companies; or if preferred a combination of the two.

13. (c) A statement in the same form as the note on the accounts should be included in the director's report.

14. (d) The trading companies should fully indemnity the agency companies against any obligations that it may incur so that the trading company bears any losses of the business.

15. The effects of this would be that both Shand Construction Limited and Morrison Construction Limited would continue to be seen by the market place as operating e.g. tendering for contracts. However, the statutory accounts for those companies would indicate that they had become dormant and that the building divisions assets and liabilities had been transferred to Morrison Building Limited and the civil engineering operations assets and liabilities had been transferred to Morrison Civil Engineering Limited. Both Shand Construction and Morrison Construction accumulative retained earnings would remain in those companies unless paid as dividends to Morrison Holdings Limited."

4. There was further discussion (see Coopers & Lybrand's letter of 1 November 1990) in which proposals were also set out. The upshot appears to be that depicted in a document headed "Draft Proposal" of 18 March 1991 which envisaged that the civil engineering division of Morrison Construction Limited might trade as a number of companies, including Morrison Construction Limited and Morrison Shand Construction Limited but not SCL, which under a further document headed "Group Restructuring" of 19 March 1991 was to become dormant. On 22 March 1991 Coopers & Lybrand submitted a memorandum in which it was recorded that it was intended that the business of the existing SCL should be transferred to a new company, Morrison Shand Construction Limited (MSCL). On 24 March 1991 Coopers & Lybrand (now Coopers Lybrand Deloitte) advised the finance director of the Group that there would have to be a note to the 1991 Auditors' Account in connection with the re-organisation. Sir A F Morrison on 25 March 1991 circulated a draft or summary relating to the Group's structure which apparently attached the chart accompanying the proposal of 18 March. These arrangements were adopted.

5. I described in the judgment of 31 March 1999 that SCL had during this period invited tenders for the earthworks for the A494 Mold By-pass to which FOQ had responded by submitting a tender on 22 January 1991. SCL had been awarded the main contract by the Welsh Office. On 18 January 1991 Morrison Construction Group Ltd gave the Welsh Office a guarantee of SCL's obligations. The main contract was sealed by SCL on 5 March 1991, and according to a statement of Mr David Quinlan, the Contracts Officer of the Welsh Office, was made by the Welsh Office on 8 March 1991. (The defendants accepted certain facts in the statement and Mr Quinlan was not called.) The main contract incorporated the ICE conditions. Clause 3 bars assignment without consent. There was no evidence that during the course of the works consent was given to the assignment of the main contract by SCL to any other company, even though on 1 April 1991 SCL's business had been transferred to MSCL.

6.. FOQ's tender was revised and a further tender was submitted on 8 February 1991 for Ł911,065. There were discussions on 6 and 8 March 1991 between FOQ and SCL about the tender. On 18 March 1991 SCL instructed an associated company of FOQ to commence the works on 8 April. There was a further meeting between SCL and FOQ on 20 March 1991 and 28 March 1991. SCL began work about 8 April 1991. On 11 April SCL wrote to FOQ:

16. "Further to your quotation dated 8 February 1991 and the subsequent meetings between ourselves, we would confirm that it is our intention to place a sub-contract order with you to carry out the earthworks in accordance with the schedule rates provided with your quotation.

17. This order will be subject to the following:

...

18. We trust that the foregoing meets with your approval and would ask that you accept this letter as an order to proceed with the works, pending completion of the formal sub-contract documents."

19. The letter was matched by another letter from FOQ on which substantial agreement was reached on 11 April. On 22 May SCL wrote to FOQ stating that they intended to enter into a sub-contract and submitted a proposed sub-contract for FOQ to sign and return. Thereafter there were a number of discussions and interchanges between the parties about the terms of the sub-contract. They were primarily endeavours to resolve disagreements about what had previously been agreed and its expression in the contract documents (see paragraph 28 of the judgment). In June 1992 SCL pressed for the return of the sub-contract documents to which FOQ replied on 5 June 1992. There was then a further meeting at which there was effectively an agreement to disagree and ultimately on 5 October 1992 SCL and FOQ agreed the sub-contract which had by then been signed by SCL, FOQ having signed its copy.

7. The work was FOQ's first major venture into carrying out earthworks as a sub-contractor. The Flood companies had previously been primarily involved in the supply of plant, including for SCL at its site at Rhuallt Hill. Mr David Flood said in his original witness statement:

20. "I had been aware of Shand Construction Limited as a well respected name in the Civil Engineering business for many years. I have watched them carrying out the nearby Kelsall By-pass and I had visited their Matlock office when tendering as sub-contractor for the Holt-Farndon By-pass. More recently I had tendered for work at the Wavertree Technology Park. In early February 1991 I obtained a set of their latest current accounts along with a credit reference. The balance sheet showed a deficiency of shareholder funds of Ł4.248 million but the company was profitable and, importantly, was stated to enjoy the benefit of the parent company guarantee for the Morrison Construction Group Limited. I decided that there was an acceptable trade risk to whom Floods of Queensferry Limited could extend credit."

21. He also said that he knew that the company was trading under the style of "Morrison Shand", but he said that he was clear as to the precise identity of SCL, ie company no. 351311.

8. The credit reference which Mr David Flood had obtained came from Abacus Company Information Limited and was a general company report on SCL dated 4 February 1991. This enclosed its accounts relating to the 13 month period ending on 31 March 1990. The report recorded that during that period the turnover had increased by 43% to Ł53,069,000 and that there was a retained profit net after taxation of Ł652,000. However, the company had an overall net deficiency of Ł4,248,000. Although two credit enquiries proved successful, the advice was:

22. "As an independent trading concern Shand Construction Company Limited cannot be considered favourable for a credit account. Until the Company file their latest financial statements to Companies House made up to 31 March 1990 showing a return to solvency all business dealings should be conducted on a pro-forma invoice or cash basis only.

23. The Company is however a wholly owned subsidiary of Morrison Holdings Limited, we therefore advise that if a credit facility is required a full report should first be obtained on that Company with a view to guaranteeing payment of all outstanding liabilities the subject may incur with yourselves.

24. If such guarantees are not obtained any credit engagement entered into with the subject must be considered a high risk."

25. Note 1 to the company accounts recorded that there was a deficiency and stated:

26. "The financial statements of the company have been prepared on a going concern basis which takes into account an undertaking by Morrison Construction Group Limited to provide such financial resources that the company may require to discharge its obligations and to support its own on-going operations".

9. I heard evidence from all three directors of FOQ about the effect on their minds of the letters of 4 February 1991 and 11 April 1991 and subsequent correspondence with SCL. Mr T P Flood and Mr A G Flood were not the operational managers of FOQ and I have no doubt that they looked to Mr David Flood to obtain the relevant information to enable them to make their decisions as he was principally responsible for running the company. Mr David Flood acknowledged that he had not sought or obtained a guarantee from a parent company of SCL and he was aware that the difference between the guarantee referred to in the accounts (which was clearly necessary in order to enable the accountants to pass the accounts on a going concern basis) and a guarantee given to a third party but he considered that the existence of the guarantee enabled him to trust the Morrison Group. In addition, in the supplementary witness statement prepared for the present issues Mr Flood said that

27. "Although SCL were given a poor credit rating by the Credit Reference Agency, I reasoned that they must have satisfied the Welsh Office in order to be on their select tender list. Also, in my own experience of dealing with them they had always been creditworthy. SCL had paid Floods Plant Hire Ltd promptly for work carried out for it on its Rhuallt Hill contract for the Welsh Office."

10. As I recounted in my judgment of 31 March 1999 by the time that work was due to resume in the spring of 1992, the Flood companies were in serious financial difficulties. Decisions were taken to issue a credit note by Floods Plant Hire Limited (FPHL) which was facing liquidation in order to preserve FOQ and its claims against SCL. This was done on 1 June 1992, the credit note being for Ł153,289.99 (see paragraphs 275-283 of the judgment - [1999] BLR 319 at 328ff.). Pressure had also been brought to bear on SCL by refusing it access to the "sacred ground" (see paragraphs 109 onwards of the judgment). By mid-year work was gradually drawing to a conclusion. Contact was made with the local MP, Mr Barry Jones, to enlist his assistance. Mr Flood made another search against SCL. Abacus sent them a further report on 18 August 1992. Abacus was not able to obtain copies of the accounts for the year ending 31 March 1992, although they had in fact been filed and ought to have been available on microfiche by mid August 1992. Accordingly the report was based upon the accounts for the year ending March 1991. These naturally showed that the company was continuing to trade in that period. There was nothing in the accounts to indicate that the company was going to cease active trading or that its business was to be transferred to some other company after the end of that financial year. The accounts were prepared on a going concern basis and supported by an undertaking from Morrison Construction Group Ltd in accordance with the procedure adopted in the previous year. Apparently the company had had quite a good year. Nevertheless because of its continuing deficiency Abacus reiterated its previous advice. SCL's accounts (which had been received at Companies House around 7 July 1992) recorded that it did not trade in the year ending 31 March 1992 and that 1 April 1991 its activities had been transferred to MCL and MSCL. On 2 October 1992 a certificate of substantial completion was issued under the main contract to SCL.

11. Later Mr David Flood obtained further reports from Abacus. On 4 November 1992 Abacus reported on Morrison Holdings Limited. It attached the accounts which showed that SCL was a dormant company. On 6 November 1992 Mr Flood obtained the accounts to 31 March 1992 of Morrison Construction Limited which was the ultimate Holding Company. Note 10(c) contained the following statement:

28. "During the year the Group introduced a new divisional structure which trades through a range of existing and newly created wholly owned trading subsidiaries. The principal changes in group undertakings which occurred during the year are as follows:

29. (i) Within the Building and Property Development Division, the businesses previously undertaken by Shand Construction Limited and Fairclough & Foster Building Limited have been transferred to Morrison Construction Limited.

30. (ii) Morrison Shand Construction Limited and Morrison International Limited have become active trading subsidiaries within the Civil Engineering Division and have taken on existing business from Shand Construction Limited.

31. (iii) Within the Utility & Energy Division, Biggs Wall & Co Limited has been renamed as Morrison Biggs Wall Limited and the Cromarty Firth Engineering Co Limited has been renamed as Morrison CFE Limited."

12. It does not appear that Mr Flood took any action on what he had read until much later. On 14 May 1993 he informed the claims consultant whom he had retained to act on behalf of FOQ (Mr Peter Kerrigan) of the upshot of his enquiries into the status of the companies, including the fact that SCL was a dormant company and that its business had been transferred to MCL on 1 April 1991. He pointed out that there had been no indication from SCL that FOQ was dealing with any company other than SCL, although from time to time other companies appeared on the scene. For example the main contractor had been stated in the first schedule to the form of sub-contract to be MSCL. On 3 October 1992 Mr Caw, the commercial manager, had acknowledged receipt of the signed contract documents apparently on behalf of that company. By this time FOQ had completed the works. Throughout payment certificates had been issued by SCL, although payments were made from a group "E" account on behalf of Morrison Construction Group Limited. Payment in this way is common and nothing can be read into it about the entity on whose behalf the group payment is made.

13. During the course of the contract FOQ's correspondence was almost entirely with SCL. That company's paper did not indicate that it was dormant or ceased to trade. It carried on as if it were trading under its company number 351311 and using the name "Morrison Shand". Occasionally, in 1992, MSCL appeared on the scene and wrote letters to FOQ under its company number 2426459 - see, for example, its letters of 3 and 4 June 1992 (a letter from Mr Caw calling for the return of the signed sub-contract documents) and a letter of 2 November 1993 (by which time Mr Flood had queried SCL's position). However, there are also instances of FOQ receiving letters apparently from MSCL - see the letter of 21 August 1992 and a letter from Mr Caw acknowledging receipt from Mr Flood of the signed sub-contract documents on 5 October 1992. Nevertheless thereafter SCL continued to correspond under its company number 351311. Occasionally MCL also corresponded with FOQ, eg on 19 April 1993. In my view all these letters are to be explained by the use by the writer, or his secretary, of the paper which first came to hand, since they amounted to routine contractual correspondence on topics that would only be raised with SCL, i.e. the company on whose behalf the letters were apparently written as there was no reason why the letter should have come from a different company. FOQ did not take up the discrepancy by writing back to say "you are not the company that we have any dealings with" from which I conclude that FOQ also did not pay much regard to the name on the top of the paper, still less the company number at the foot, but concentrated on what was being said by the relevant writer.

14. In March 1994 Mr Flood decided to pursue the discrepancies in the filed accounts and reports as he believed that there was some conspiracy. He asked SCL's auditors, Coopers & Lybrand, for an explanation and, when he did not receive one, made a complaint to the Institute of Chartered Accountants in Scotland on 9 June 1994. This led the Institute to start disciplinary proceedings against Mr James S Kinghorn on 18 December 1996. Ultimately Mr Kinghorn pleaded guilty to three charges that he had:

32. "1. on 23 May 1991, signed audit reports on the Financial Statements for the year ended 31 March 1991 of Morrison Construction Group Limited and, inter alia, its subsidiary company, Shand Construction Limited, not having satisfied himself, by reviewing the relevant audit working papers, that the audit assignment had been carried out to the required standard in terms of the provisions of Paragraph 34 of Auditing Guideline 102 and Paragraph 13 of Auditing Guideline 201: and

33. 2. failed to ensure disclosure in the Financial Statements of the aforementioned Shand Construction Limited for the year ended 31 March 1991 of a material-post balance sheet event in accordance with Statement of Accounting Practice 17, namely the transfer of that company's business on 1 April 1991 to another group company, contrary to the provisions of Auditing Guideline 205; and

34. 3. between around 12 October 1995 and the date of presentation of the formal complaint, failed to safeguard the working papers relating to the audit assignments referred to in 1 and 2 above, contrary to the provisions of Paragraph 24 of Auditing Guideline 201."

15. By an agreement dated 6 September 1993 MCL formally acquired the assets and business of MSCL. The Welsh Office had been informed of the transfer on 29 March 1993 and on 27 May it informed the Group that it did require formal assignments of contracts within the Group, including the assignment of the main contract for the Mold By-Pass. In 1994 the Welsh Office treated the contract as having been assigned to MSCL and thence by novation to MCL. (These events are part only of a sequence.)

16. In 1993 and 1994 the technique of issuing credit notes was again employed to save FOQ. On these occasions the notes were issued by Floods Plant Ltd (FPL), another associated company, in order to reduce its indebtedness to FOQ by 95% (see paragraphs 284 onwards of the judgment). FPL had previously sold FOQ items of plant and equipment. They included a CAT D 300 for which Ł40,000 was paid and a CAT 206 for which for Ł14,133.44 was paid. FOQ had then sold them to Finning Limited in March 1994 for Ł51,000 and Ł20,000, respectively. (All figures are exclusive of VAT.) At an EGM of FOQ on 9 June 1994 it was recorded that the inter company debt was Ł238,033.96 and that FPL was to go into liquidation. A credit note for Ł226,132.27 was issued by FPL on the same day. After FPL had been put into liquidation, Mr David Flood, as a director of FPL, made a statutory statement under the Insolvency Act in which he said that none of FPL's assets had been transferred at less than value in the previous three years and none of the company's assets had been disposed of otherwise than in the ordinary course of business in the previous five years. In my judgment these statements were not true, just as Mr Flood's account of the events concerning the nature and timing of the decisions in 1992 concerning the credit note was not entirely correct.

17. In August 1994 solicitors acting for FOQ wrote to a number of directors in which they made the claims which subsequently appeared in the action which was started in October 1994.

18. On 8 September 1995 a retroactive agreement was made between SCL and MSCL which recorded the companies had "entered into an oral agreement on the Completion Date (as defined below) ("the Oral Agreement") whereby [MSCL] agreed to purchase the Business and the Assets .... of [SCL]" and they "now wish to document the terms of the Oral Agreement". It continued:

"NOW THEREFORE IT IS HEREBY AGREED as follows :-

1. INTERPRETATION

35. 1.1 In this Agreement including the Recitals the following expressions shall have the following means unless the context otherwise requires:-

36. "the Assets" the entire undertaking of the Vendor at the Completion Date including without prejudice to the foregoing generality the Book Debts, the Goodwill, the Plant and Machinery, the Stocks, the work-in-progress of the Business, the Records, the benefit subject to the burden of the Ongoing Contracts, and all (if any) cash in hand and at bank in relation to the Business;

37. "the Book Debts" all trade and other debts relating to the Business and due to the Vendor as at the Completion Date including the benefit of pre-payments;

38. "the Business" the business of civil engineering carried on by the Vendor at the Completion Date;

39. "the Completion

40. Date" midnight on 31 March 1991

41. "the Goodwill" the goodwill and business connections of the Business including the right of the Purchaser to hold itself out as carrying on the Business in succession to the Vendor;

42. "the Liabilities" all the liabilities of the Business at the Completion Date including without prejudice to the foregoing generality the burden of the Ongoing Contracts, the trade and other creditors and accrued charges of the Vendor (including the liability of the Vendor to its bankers if any) in relation to the Business at the Completion Date;

"the Ongoing Contracts" all contracts, agreements, engagements and/or arrangements in relation to the Business to which the Vendor is a party and which are outstanding or pending as at the Completion Date:

2. PURCHASE AND SALE

43. Subject to the provisions herein contained the Vendor did sell and the Purchaser did purchase with effect from the Completion Date the Business and the Assets subject to the Liabilities.

3. CONSIDERATION

44. The consideration for the purchase of the Business and Assets was Ł3,310.793."

45. Finally I should record that on 10 October 1997 MSCL guaranteed payment of any judgment that FOQ might obtain against SCL.

19. FOQ's case was that it was misled about the trading position and status of SCL and that had it known that SCL was a dormant company and not the main contractor (since MSCL was the main contractor) it would not have entered into a contract with it, or would have stopped work and accepted payment upon a quantum meruit and not entered into the sub-contract, and thus lost the chance to re-negotiate the sub-contract on more favourable terms. The misrepresentations were made either by SCL or by MSCL on behalf of SCL. FOQ relied on section 2(2) of the Misrepresentation Act 1967, so that, as noted by the Court of Appeal ((1996) 81 BLR 31 at page 45D-G), the claim is one for damages in lieu of rescission and thus made against SCL. Sections 1 and 2 of that Act are as follows:

46. "1. Removal of certain bars to rescission for innocent misrepresentation

47. Where a person has entered into a contract after a misrepresentation has been made to him, and -

48. (a) the misrepresentation has become a term of the contract: or

49. (b) the contract has been performed;

50. 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.

51. 2. Damages for misrepresentation

52. (1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.

53. (2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.

54. (3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1)."

55. FOQ claimed that its damages should be calculated by determining the overall loss that it suffered by reason of entering into the sub-contract and making an assessment of the chance that FOQ would have been able to avoid or diminish its loss.

20. Mr Reese for SCL contended, in part, that there was no operative misrepresentation as alleged; that FOQ would not have acted otherwise even if it had known the true position; that the misrepresentation would not have entitled FOQ to rescission; that FOQ had delayed and acted inefficiently; that taking into account the credit notes that had been issued the company had suffered no loss as its actual site costs were Ł829,236 which it had been recovered; and that any losses were of its own making (eg under-estimates in its tender and in efficiency in carrying out the work).

21. Mr Nicol submitted, amongst other things, that it was not necessary to establish that the contract would have been rescinded in order to recover damages under section 2(2) and that in awarding damages no account should taken of the credit notes.

22. In my judgment the filing of accounts by a company does (or may) give rise to representations of fact about the financial and other positions of the company. They are intended to read by a person who might deal with the company or be dealing with it. They need not therefore have been communicated by the company to the representee directly or through an agent. However the accounts filed for SCL's financial year ending March 1990 were true: the company was trading profitably, albeit with a net deficiency. Like many companies within a group its accounts were prepared on a going concern basis as it needed the support of another company (Morrison Construction Group Ltd). FOQ was warned by Abacus that it might need a guarantee. FOQ did not act on that warning. I reject the suggestion that it was thought that the inter-company guarantee could in some way have protected FOQ. Like much else of the evidence given for FOQ it smacks of hindsight. Mr Flood's evidence in the crucial areas was not in my judgment credible. For example, the fact that Mr Flood did not heed Abacus' advice to obtain a guarantee shows that the inquiry was a formality and that FOQ was intent on carrying out the works so as to become established as an earthworks sub-contractor. I do not accept that either Mr Flood or co-directors were concerned about extending credit to SCL. Mr Flood acknowledged that FPHL had always been paid promptly by SCL. The amount of credit on operations of this kind was not great but if it had been then a guarantee would at least have been sought.

23. For a misrepresentation to be actionable it must be generally be of an existing or past fact. The information provided by SCL related only to its position in the relevant financial year (subject to post year-end qualifications which do not apply here). There was no representation as to the future, nor could there have been any such representation in February 1991 based on the 1990 accounts. It would be extraordinary if information provided by a company such as SCL about its finances in a given year were to be treated as continuing representations to the world that there had been no material alteration in the company's position. I therefore reject the case that the accounts contained any misrepresentation as to the financial position of SCL in the years ending 31 March 1990 or 1991. However the accounts for the latter year which were obtained in 1992 ought to have stated that SCL had ceased to trade. Although the event occurred after the end of the year it was a material event and the fact ought to have been stated in the accounts. To that extent the accounts for that year although otherwise true represented that the company was still trading when it was not.

24. For a misrepresentation to be actionable it must be shown that it also induced a party to make a contract. In April 1991 a conditional contract was made by FOQ acting on and carrying out work pursuant to SCL's letter of intent of 11 April, which was itself the continuation of earlier correspondence. However there was no obligation on the part of FOQ to complete the works as there was no contract to that effect; it could have stopped at any time and recovered payment upon a quantum meruit which would have been assessed by reference to the agreed rates in the Bills so FOQ would then and subsequently have been in no better position by not having a sub-contract on the terms offered and acceptable to it (subject to the reservations which were resolved by agreement). A misrepresentation to be effective in law need not be the sole or even a dominant cause provided that it is one of the underlying causes. Nonetheless in my judgment FOQ decided to tender for and enter into this contract on the basis of Mr David Flood's judgment of SCL which had been formed not by what it knew of SCL from the credit inquiries that he had obtained but from its previous work for the group and his knowledge of it. The original tender was submitted before the credit inquiries had been obtained. They merely confirmed what was already known to FOQ, namely that SCL and the Morrison Shand Group, were, within the framework of the construction industry, sound and, as Mr Flood said, an "acceptable trade risk". In my view even if SCL's accounts were to have constituted a representation the decisions to tender, to revise the tender, to negotiate with SCL and to proceed with the work were made by the directors of FOQ on the basis of their own judgment (or that of Abacus) of the standing and reputation of SCL and the Group and as to what might be inferred for the future from the accounts, which were by then out of date. The representation relied on by FOQ did not therefore induce the contract made in 1991.

25. On and after 11 April SCL certainly represented itself to be the main contractor and that was plainly an operative representation. FOQ would not have contracted with a company that was not the main contractor. The letter of intent ought not to have been written by a director who knew or ought to have known that SCL had ceased to trade, nor ought the correspondence and payment certificates to have come from SCL. The sub-contract was not however made until September or October 1992. Apart from an unexplained reference to MSCL in the first schedule to the subcontract (which passed unnoticed at the time) SCL was otherwise the company referred to in the contractual documents. I do not consider that it misrepresented itself by not mentioning that it had ceased to trade actively. The Welsh Office had awarded it the contract. The group re-organisation which took effect internally on 31 March 1991 merely transferred SCL's business to MSCL. It did not purport to assign the contract. Prohibitions on assignment are commonplace in the construction industry so the Morrison Group would naturally wish only to assign where consent was forthcoming. None was evidently given prior to the sub-contract being made in 1992. SCL therefore remained the main contractor and thus did not misrepresent itself. SCL had not therefore really ceased to trade as it was still the main contractor and held its rights for the benefit of MSCL. It took on the role contemplated for it in the group re-organisation. Except for accounting purposes it was not therefore truly dormant. Even if the transfer of the business were an assignment it was valid only as between MSCL and SCL. Unless and until the Welsh Office gave its consent SCL was in April 1991 and remained the main contractor until the subcontract was signed in the autumn of 1992. Indeed the paradox of FOQ's case is that it claims that the company with whom it contracted and for whose benefit it carried out the sub-contract works was not the main contractor. The commercially dormant status of SCL does not of course prevent it in law from making a contract or from representing itself as the company to whom the main contract had been awarded and which was responsible to the Welsh Office for the completion of the works under that contract. Both such representations were therefore true. MSCL could not have said to a third party such as FOQ either that it was the main contractor or even that it was the assignee of the main contract since without the consent of the Welsh Office it would have been incorrect so to have stated or to have led anybody else to believe that that was the situation. Accordingly I do not consider that SCL made any misrepresentation nor did it make any which induced either the conditional contract of 1991 or the contract of 1992.

26. But even if SCL misrepresented itself I have no doubt that FOQ would not have been concerned with the precise identity of the company within the Group which would be the main contractor, provided that it was acceptable to the Welsh Office. It was not troubled by corporate niceties. It submitted a tender even though SCL had invited FPHL to tender. Mr Flood did not pick up or question MSCL in the first schedule nor the various changes of name that occurred in the correspondence. Above all although he learned in late 1992 that SCL was a dormant company and had ceased to trade on 31 March 1991 (and that it thus might not be the main contractor) he did nothing for many months and it was not until proceedings were taken that it was said that FOQ was affected. Like much of Mr David Flood's evidence I do not accept his evidence that FOQ would not have contracted at all in 1992 if SCL had not been the main contractor. From April 1991 it would have contracted with any Morrison Shand company and it would have carried out the works in the same way. Mr Reese rightly submitted that the representation is not that SCL was the active main contractor, merely that it was the nominal main contractor. Certainly by the time FOQ came to sign the subcontract virtually all its losses had been incurred. It is plain that it signed the sub-contract in order to be able to recover them. It is absurd to think that if FOQ had then known that SCL was not the main contractor and had ceased to trade it would have declined to sign a sub-contract and would have taken its chance on recovery upon a quantum meruit from that very company (for no other entity had authorised it to proceed with the work). To the extent that such losses have not been recovered then on the findings made in my judgment of 31 March 1999 such costs and losses would not have been recoverable upon a quantum meruit as they were incurred as a result of FOQ's own making. The propositions that it would have declined to sign any sub-contract and that such costs or losses would have been avoided or that they would have been recoverable upon a quantum meruit are fanciful and untenable.

27. Mr Reese also maintained that damages would not be recoverable under section 2(2) of the Misrepresentation Act as they were only recoverable if rescission was available. The words of section 2(2) have been the subject of discussion. As Professor Hugh Beale observed in his note at (1995) 111 LQR 386 (now reflected in paragraph 6-097 of Chitty on Contracts, 28th ed. of which he is the General Editor and editor of the chapter on misrepresentation):

56. "The difficulty is one which has been noted ever since Atiyah and Treitel's commentary on the Act in (1967) 30 M.L.R. 396. Do the words "if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission" mean that the right to rescind, if it has not already been exercised, must still exist at the time of the hearing; or is it sufficient that it did exist at one time?".

57. Mr Reese submitted that the first meaning was the correct interpretation. He referred to Atlantic Lines & Navigation Co Inc v Hallam Ltd, The "Lucy" [1983] 1 Lloyd's Rep. 188 in which at page 202 Mustill J. had accepted that once the right to rescind has been lost through one of the bars to rescission, the court has no further power under the sub-section to award damages. On the other hand in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 Jacob J held otherwise. He thought that the sub-section was ambiguous but he resolved the ambiguity by applying Pepper v. Hart [1993] AC 593, and by utilising a statement by the Solicitor-General who had sought to assure Members of Parliament who had been concerned at the deletion from the Bill of clause 1(2) (which would have preserved the rule that an executed contract of sale of land or of lease for more than three years could not be rescinded). The Solicitor-General said (Hansard, 20 February 1967, col. 1387):

58. "The hon. Gentleman put to me the case of a 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 said that a third party had come onto 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.

59. My answer is that a case of that sort would be covered by Clause 2(2).... .

60. That is the option which is given to the court, 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 the matter is really covered."

61. Professor Beale rightly pointed out that the Solicitor-General's statement is itself not without ambiguity (which he suggested might be accounted for by the fact that it was given at 3 am) and that it is at variance with paragraph 27 of the Law Reform Committee's 10th report upon which the Bill was based and with parts of its passage through Parliament. However Chitty now considers that the consequences of the second meaning suggested by Atiyah and Treitel are so unsatisfactory that the first meaning endorsed by Jacob J is to be preferred. Mr Reese also relied on McGregor on Damages in which at paragraph 2021 it is said in footnote 5 (page 1314) that

62. "the better view is that damages can be available where in the particular circumstances of the case rescission was itself was a possibility. After all, the purposes of the sub-section was to cut down on rescission because of its drastic nature and the therefore the substitute of damages is only required where rescission could have held the day."

63. Mr Nicol submitted that the contrary view was taken in Production Technology Consultants Ltd v Bartlett, CA (1988) unreported except in [1988] EG 121; [1988] BTLC 225, and that in William Sindall plc v Cambridge CC [1994] 1 WLR 1016 the Court of Appeal supported an approach to the construction of section 2(2) which favoured compensating a representee even if the contract could not be rescinded, eg as set out in Hoffmann LJ's reference to the Law Reform Committee's Report at page 1036.

28. First, like Professor Beale I do not consider that section 2(2) is ambiguous. In my judgment the second meaning suggested by Atiyah and Treitel is really only viable because of the consequences of the first meaning which is otherwise the literal but natural reading of the Act. Section 1 makes it clear that two of the former bars to rescission are to be removed so that under section 1(b) rescission is to be available even if the contract has been performed but that right is "subject to the provisions of this act", ie to section 2(2), so that it may be equitable to declare the contract subsisting, even if it had been lawfully rescinded. Section 2(2) is of general application. If proceedings are brought the court has first to decide whether "the contract ought to be or has been rescinded". The purpose of rescission is still to restore the parties as nearly as possible to the position in which they were before the contract was made: Newbigging v Adam (1886) 34 Ch D 582. In my judgment the court must therefore reach its decision in the light of the situation at the date of trial. It cannot sensibly perform this preliminary exercise at some notional earlier date for it is the first step to determining whether it ought to declare the contract subsisting and then to consider damages should be awarded. What would be the earlier notional date? In Sindall Evans LJ said at pages 1042F and 1044E:

"Rescission or damages

64. Our finding that Sindall are not, and were not, entitled to rescind the contract, as they purported to do, makes it unnecessary for us to decide the issue raised under s 2(2) of the Misrepresentation Act 1967, that is whether in the present case it would be 'equitable', notwithstanding the actionable misrepresentation,'to declare the contract subsisting and award damages in lieu of rescission'. The issue, however, was argued before us (though Mr Etherton was not called upon to reply) and like Hoffmann LJ I consider that if it had been necessary for us to review the judge's exercise of the discretion, then we would have been free, indeed bound, to do so.

......

65. The starting point for the application of the subsection is the situation where a plaintiff has established a right to rescind the contract on grounds of innocent misrepresentation; its object is to ameliorate for the innocent misrepresenter the harsh consequences of rescission for a wholly innocent (meaning, non-negligent as well as non-fraudulent) misrepresenter, in a case where it is fairer to uphold the contract and award damages against him. Such an award of damages was not permitted in law or equity before 1967. The court, therefore, exercises a statutory jurisdiction, and it does so having regard to the circumstances at the date of the hearing, when otherwise rescission would be ordered. (The subsection envisages that the court's order may restore a contract which has been lawfully rescinded by the innocent party at some earlier date: see Atlantic Lines and Navigation Co Inc v Hallam Ltd, The Lucy [1983] 1 Lloyd's Rep 188 at 202 per Mustill J.) "

66. Russell LJ agreed with the judgment of Evans LJ (although of course, as in The Lucy, this part of the judgment was, strictly, obiter). Hoffmann LJ did not deal with the point in the same way but I infer that he was of the same opinion since he said (at page 1035E):

67. "My conclusion that there are no grounds for rescission, either for misrepresentation or mistake, means that it is unnecessary to consider whether the judge correctly exercised his discretion under s 2(2) of the Misrepresentation Act 1967 not to award damages in lieu of rescission."

68. I do not consider that the earlier case of Product Technology (which was not cited in Sindall) is of assistance: it concerned section 2(1).

29. In my view, if rescission is to continue to bear its traditional meaning and to serve its purpose, a court surely could not declare as subsisting a contract which had been affirmed since the time when it was or might have been rescinded or in respect of which there was some other similar bar to rescission. Although performance as such is no longer a bar to rescission it is very difficult to see how rescission can be ordered if it is not possible to put the party in as good a position as it was before the contract was made. The Misrepresentation Act only removed some of the grounds which have long precluded a party obtaining rescission. It should not be read as doing more than it provided. There are plainly unsatisfactory consequences, whichever is the right construction of section 2(2), but I do not consider it possible or right to give it a wider meaning than its words plainly bear. Although the observations of Mustill J and Evans and Russell LJJ are not binding I give them great weight not only since their judgments always command respect but also because both in The Lucy and Sindall there had been full argument. They all thought that the "literal" interpretation was the correct result. In my judgment therefore section 2(2) is only available to FOQ if the contract could now be properly rescinded. I do not therefore adopt the view of Jacob J.

30. It is long established that rescission is not available if restitutio in integrum is not possible eg where building works have materially affected land. In addition in the case of a contract for services such as those performed by FOQ as a sub-contractor it is quite impossible to do so as the rights of a third party, the Welsh Office, would be affected. No useful purpose would be served by rescission. In my judgment even if the true position had been known FOQ would have contracted with MSCL or MCL. It is nonsense to think that it could or would have negotiated better terms. In 1991 it wanted the work and had no reason to seek better terms. In 1992 it was too late; the work was finished. It had no leverage to secure better terms. It will suffer no damage as a result of contracting with SCL since SCL's obligations to FOQ have been guaranteed. In Sindall Hoffmann LJ said at page 1037B:

69. "Damages under s 2(2) are therefore damages for the misrepresentation as such. What would be the measure of such damages? This court is not directly concerned with quantum, which would be determined at an inquiry. But since the court, in the exercise of its discretion, needs to know whether damages under s 2(2) would be an adequate remedy and to be able to compare such damages with the loss which rescission would cause to Cambridgeshire, it is necessary to decide in principle how the damages would be calculated."

70. Accordingly FOQ do not need to have its contract rescinded. Furthermore in my judgment there was delay since in November 1992 FOQ knew all the facts now relied on but took no action until 1994. Mr Flood sought no advice from his claims consultant until about May 1993 even though he then thought that there had been a misrepresentation. In my judgment therefore FOQ's claim for rescission would therefore have failed.

31. Even if I am wrong in my interpretation of section 2(2) FOQ is not to be awarded damages. The damages recoverable under section 2(2) are not the same as those recoverable under section 2(1) (loss or damage arising from having entered into a contract). The court has a broad discretion to do what is equitable. Hoffman LJ in Sindall also said (at page 1036H, ie the passage immediately preceding that quoted above):

71. The second matter to which the court must have regard is 'the loss that would be caused by it [the misrepresentation] if the contract were upheld'. The section speaks in terms of loss suffered rather than damages recoverable, but clearly contemplates that if the contract is upheld such loss will be compensated by an award of damages. Section 2(2) therefore gives a power to award damages in circumstances in which no damages would previously have been recoverable. Furthermore, such damages will be compensation for loss caused by the misrepresentation, whether it was negligent or not. This is made clear by s 2(3), which reads as follows:

72. 'Damages may be awarded under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under subsection (2) shall be taken into account in assessing his liability under the said subsection (1).'

73. Evans LJ said at pages 1042G - 1043A:

74. "Section 2(3) makes it clear that the statutory power to award damages under s 2(2) is distinct from the plaintiff's right to recover damages under s 2(1). Quoting from s 2(2) itself, such damages are awarded 'in lieu of rescission' and the court has to have regard to three factors in particular, namely, the nature of the misrepresentation, the loss that would be caused by it (sc the misrepresentation) if the contract was upheld, and the loss that rescission would cause to the other party (sc the non-fraudulent author of the misrepresentation).

75. It has not been suggested that these three are the only factors which the court may take into account. The discretion is expressed in broad terms—'If of opinion that it would be equitable to do so'. The three factors, however, in all but an exceptional case, are likely to be the ones to which most weight would be given, even if the subsection was silent in this respect."

32. Here I do not consider that much weight should be attached to the nature of the misrepresentation unless, contrary to my earlier conclusions, FOQ would not have entered into any contract and would therefore have suffered no loss whatsoever, ie the difference between its contractual entitlement and its actual costs. I interpose to say that FOQ's claimed loss in respect of on costs would not have been of the order of 10% as this figure was a concession; the true figure would be no more than 5%, as suggested by SCL; I thought that 3% was sufficient for profit - see paragraph 299 of the judgment. Equally I do not consider that any allowance or discount should be made for the consequences to SCL of rescission, ie in having to pay FOQ a sum equivalent to a quantum meruit as that would be the inevitable consequence of misleading FOQ. So what is the loss that would be caused by the misrepresentation if the contract were upheld? It is not necessary to consider the position in relation to each misrepresentation or supposed misrepresentation.

33. Mr Reese relied on the decisions that I reached in respect of the credit notes (see paragraphs 275-298 of my previous judgment) . He submitted that if the credit notes were taken into account FOQ had already recovered its costs of Ł829,236 and had thus suffered no loss as a result of the misrepresentation. It had been paid Ł831,225 and was entitled to a further Ł214,793 under my judgment, ie a total of Ł1,046,018. Mr Nicol naturally formally submitted that I had reached the wrong conclusions for the reasons that had been advanced on behalf of FOQ by Mr Timothy Elliott QC. I still do not consider that I did so. I need not restate my reasoning. In my judgment the credit notes must be taken into account in an award of damages, whether for breach of contract or in tort, and thus under section 2(2).

34. Section 2(2) authorises the award of damages. It was common ground, that as McGregor on Damages says, the effect of section 2(3) is that the damages that may be awarded under section 2(2) will, or at least can, be less than those awarded under section 2(1). I shall not attempt to decide whether the criticisms made of Sindall in McGregor are right for two reasons: first, I consider that I ought follow the careful reasoning of the Court of Appeal that a contractual basis is appropriate since they took into account the views as then expressed in McGregor; secondly,it is clear that neither calls into question the principle that a loss that has been avoided cannot be taken into account, indeed there are clear indications in the judgments of Hoffmann and Evans LJJ that under section 2(2) the position of the date of trial is or may be relevant. This is not a case where SCL could have had in contemplation FPHL or FPL so that their losses might be brought back into the equation, pace St Martins Property Corp. Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85. In addition it would not in my judgment be equitable to require SCL to compensate FOQ for losses which were cannily averted at the expense of the creditors of those two companies, primarily, it seems the taxpayer. One of the results was to dodge payment of a significant amount of VAT. (It is fair to record that HM Customs & Excise did not object.) They were unconnected with the misrepresentation. Above all I am convinced that FOQ would have contracted on the same terms with another company, such as MSCL, had it been put forward. Thus even it had known the true position it would have been in the same position as it is now so it would not be equitable or right to attribute its losses to any misrepresentation. It has the benefit of a guarantee of SCL's obligations. Quite apart therefore from the conclusion that FOQ's losses were its responsibility I would not have made any award of damages to FOQ under the discretion given by section 2(2).

35. This claim of FOQ will therefore be dismissed.