Insurance Contracts CP - Law Reform Commission

―would, in our judgment, on the ordinary meaning of words be inapt to refer to a
misrepresentation which had not been made in fact but was (at most) merely deemed by the
common law to have been made. If it had been the intention of the legislature that a mere
failure to discharge the duty of disclosure in the case of a contract uberrimae fidei would fall to
be treated as the ‗making‘ of a representation within the meaning of the 1967 Act, we are of the
opinion that the legislature would have said so.‖ 27
10.26 Rix LJ in HIH Insurance also stated that breach of the duty of good faith leads to only to an
avoidance remedy. 28
(b)
The discretion to award damages in lieu of rescission
10.27 Section 2(2) of the Misrepresentation Act 1967, which was the legislative template for section
45(2) of the Sale of Goods and Supply of Services Act 1980, provides an additional statutory relief by way
of damages following a pre-contractual misrepresentation:
―(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the contract ought to be or has been rescinded, the court may declare the contract subsisting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.‖
10.28 Paragraphs in the Tenth Report of the Law Reform Committee 29 explain the thinking that
prompted this legislative change. The Law Reform Committee clearly felt that it was necessary to restrict
the representee‘s right to rescind the contract on the basis that damages would be a more proportionate
remedy: after referring to the ―drastic‖ remedy of rescission and proposals in the Report to make this
remedy more widely available than hithertofore, the Committee recommended that damages should be
available to a court as an alternative to rescission:
―Unless the court‘s power to grant rescission is made more elastic than it is at present, the
court will not be able to take account of the relative importance or unimportance of the facts
which have been misrepresented. A car might be returned to the vendor because of a
misrepresentation about the mileage done since the engine was last overhauled, or a transfer
of shares rescinded on account of an incorrect statement about the right to receive the current
dividend. In some cases the result could be as harsh on the representor as the absence of a
right to rescind under the present law can be on the representee.‖ 30
10.29 Section 2(2) of the Misrepresentation Act 1967 has also been adopted in some Australian
jurisdictions and in Hong Kong. What is surprising about the provision is just how little the provision has
been used by the judiciary. Some of the reasons for this underutilisation may be traced back to the rather
tentative nature of the 1967 reform itself. There is no right to damages in lieu: the Law Reform
Committee recommended a judicial discretion be enacted:
―we recommend that wherever the court has power to order rescission it should, as an
alternative, have a discretionary power to award damages if it is satisfied that these would
afford adequate compensation to the plaintiff, having regard to the nature of the representation
and the fact that the injury suffered by the plaintiff is small compared with what rescission
would involve.‖
10.30 Section 2(2) clearly has no application to cases of fraudulent misrepresentation. It is also
arguable that in cases where an insurer is seeking to avoid a contract of insurance for innocent
misrepresentation or non-disclosure, rescission is not the remedy that the insurer seeks to invoke. The
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[1989] 2 All ER 952 at 1004.
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2001] 2 Lloyd‘s Rep. 483.
(July 1962). Cmnd. 1872, Innocent Misrepresentation.
Ibid. Paragraph 11.
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