Change of Law in Relation to Mistake in the law of Contract

Change of Law in Relation to Mistake in the law of Contract

Case of Shogun Finance Ltd. And Hudson

Proverbially speaking, the law is an ass, reason being that most of the rulings arrived at, or even some of the statutes that are followed as precedent; tend to be quite contentious in nature. A relevant case in point is that of Shogun Finance Limited V. Hudson, whereby a crook, under the alias of a Mr. Durlabh Patel, entered into a Hire-Purchase contract with the Finance Company as to acquire a motor car. A driving license was availed, and subsequently certified, as was the creditworthiness of ‘Mr. Patel’. The motor dealer was given the green light to transact with the crook. Later, there emerged an innocent third party, one Mr. Hudson, to whom the crook sold the motor vehicle, before proceeding to disappear. The real Mr. Patel was in the dark regarding the goings-on. The pivotal issue was whether Mr. Hudson could bring to light the fact that indeed there was an agreement between the crook and the Finance company, according possession of the vehicle in question to the crook, under the veil of Mr. Patel. However, this proved a tall order for Mr. Hudson, against whom judgment was passed. The Court of Appeal held that Mr. Hudson did not escape liability because it was not the crook that was named in the written Hire-Purchase contract, and hence he was not the debtor under the agreement.

This judgment opened a Pandora’s Box, as a number of issues were coincidentally raised, forever changing the face of law relating to instances of ‘mistaken identity’ as the legal realm knows it. First of all, there arose the crucial question regarding the effect of fraudulent misrepresentation on contract formation, setting the stage for a number of discernible scenarios, including ascertainment of the circumstances under which a crook may enter into contracts with the owner of goods; should the crook misrepresent himself as another identifiable party, tricking the owner into parting with goods, is there a contract between the two?-questions arise as to whether the appropriate answer to the above query would significantly change if due consideration were to be paid to the circumstances under which the parties contracted, that is, whether by correspondence, face to face, or other media. Distinctive features arise as to the modal ways in which the fraudster misrepresented himself – was it by asserting his creditworthiness falsely or passing himself off as being a person of known financial repute? This has the effect of determining the type of contract entered into, either void (‘no contract at all), or voidable, at which option either one of the parties has a repudiation remedy. Should there be an instance where the crook misrepresents his creditworthiness as per the first scenario, the owner may claim a mistake as to the attributes of the crook, repudiating the voidable contract. In the second scenario, the contract is rendered void, as the seller – in some circumstances – may be held to have made a mistake as to the person’s identity.

            A twist in the tale arises should the crook sell the acquired goods to a third party; rights and remedies of the latter (third party) are dependent on whether the contract was void or voidable. Should the crook have misrepresented his financial position, the owner of the goods bears the brunt, but should the crook have asserted himself as someone else, as was the case in Shogun Finance V. Hudson, loss mostly falls upon the third party who was also duped in the transaction. Although the third party had legally paid for the goods, he must return them, or repay their value to their original owner. This distinction as to ‘identity’ and ‘attributes’ has raised contention, especially considering that there have been developments in the legal arena since this was initially indoctrinated as precedent.

There consequently begs the question as to whether or not the fraudulent misrepresentation affects the intention of a party while entering into contracts. It is held that fraud does not negate intention in the process of transacting business, but succeeds in negating the legal rights and/or obligations arising from the intention to contract. The victim may thus cease from carrying on the contract into which he was induced to enter into, and the remedy of damages applies in instances where loss may have been suffered. Point of note here is that fraud does not negate contract formation, but effectively negates legal rights and/or obligations accruing from a party giving consent to a particular happening; consent is regarded a matter of fact, and fraud only negates legal rights, opposed to matters of fact.

            In instances where a crook hoodwinks an owner into parting with goods, after misrepresenting himself as another party, the owner has the remedy of obtaining money from the crook, given that his whereabouts can be ascertained. Should a third party buy the same goods from the crook, there emerge two innocent parties. It was initially held that in such circumstances, there should be a sharing of the loss between the owner and the third party ‘in proportions that are just in all circumstances’, a premise that was later revised to stipulate that the contract was voidable, as far as the third party is concerned. Other statutory exceptions hold that, where the owner of the goods parted with them consensually, the third party may acquire good title had the crook a voidable one, or even were the crook in possession of the goods with the consent of the owner. Also, a section of the Hire-Purchase Act of 1964 expressly made a limited exception for the protection of motor vehicle purchasers.

            In instances of face to face dealings between the crook and the owner, it is acknowledged that the fraudulent misrepresentation by the crook regarding his identity does not negate the owner’s intention to transact with him, or that a seller’s misrepresentation about the description/identity of goods sold does not negate the buyer’s intention to buy the same. Thus, the fraud allows the owner to avoid the contract, but does not negate its formation. Even where such transactions are evidenced in writing, the outcome is similar. This immateriality extends to instances of dealings via correspondence. However, where a written offer is made by the owner of goods to a party, where a crook had fraudulently misrepresented himself as the said party, the crook is not in a capacity to accept the offer, hence, there can be no contract between the two.

            Given two innocent parties, he who inherently risks parting with the goods without receiving payment should bear the loss, appropriately fitting with the principle of ‘nemo dat non quod habet’ (one cannot give what one does not have). Purchaser’s rights should not depend upon the precise form the crook’s misrepresentation takes. The pressing matter that arises is whether to adopt the decision held in ‘Phillips V. Brooks Ltd (1919)’, where it was decided that a jeweler had been induced to enter into a voidable contract with the crook who faked his identity, or that in ‘Cundy V. Lindsay (1878)’, where it was held that Lindsay Company did not have the slightest intention of dealing with a crook, and the lack of consensus of mind resulted to no contractual arrangement. The latter scenario is generally more practicable.


House of Lords.2002, Shogun finance Limited V. Hudson, United Kingdom Parliament, London, viewed 16th December 2008, <>.