Rescission After an Innocent Misrepresentation
A buyer purchases a small bakery business for 210,000 in reliance on the seller's statement that annual turnover was 300,000. The seller honestly believed this, having relied on a manager's figures, but the true turnover was 190,000. The buyer discovered the truth five months after completion and continued trading for a further seven months, during which the business made a modest profit and the buyer recruited two new wholesale customers. The buyer now seeks rescission and restitution of the price. The seller accepts the statement was false but argues rescission is barred because the buyer affirmed the contract and because the business has changed since completion. The lease has 18 months left and is assignable; the equipment is largely unchanged.
1. Assess whether rescission is available, identifying the bars the seller relies on and how each applies.
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Rescission for innocent misrepresentation is available at common law/equity, but it is discretionary and subject to bars. The seller raises two: affirmation and change of position/impossibility of restitutio in integrum. On affirmation: the buyer knew of the falsity five months after completion yet continued trading for seven further months, recruited wholesale customers, and took profits. Continuing to operate with knowledge can constitute affirmation - an election to keep the contract alive - but mere lapse of time is not automatically affirmation; the court asks whether the buyer's conduct, objectively, communicated a decision to affirm. Recruiting new customers and taking profits cuts against the buyer. On restitutio in integrum: rescission requires the parties to be restored substantially to their original positions. The lease is assignable and equipment largely unchanged, so substantial restoration may still be possible; the modest profits are accounted for by an account of profits rather than a bar. The stronger bar is affirmation.
2. If rescission is refused, what alternative remedy should the buyer pursue and on what basis?
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If rescission is barred, the buyer should claim damages, but must confront the type of misrepresentation. For innocent misrepresentation, damages are not available in deceit (no knowledge of falsity) and the Misrepresentation Act route requires the representor to prove reasonable grounds for belief; here the seller relied on a manager's figures, which may or may not discharge that burden. If the seller cannot show reasonable grounds, the buyer may recover under the statutory damages provision as if the representation were fraudulent, subject to the court's power to reduce the award in lieu of rescission where that is fair. The buyer's measure is the difference between the price paid and the true value of the business as represented versus as it actually was - roughly the capitalised effect of the 110,000 turnover shortfall, not the shortfall itself. The buyer's post-completion trading profits and new customers will be set against the loss to avoid over-compensation. The buyer should also consider whether the manager's figures give a separate claim, but the immediate target is the seller.