Judgments - Shogun Finance Limited (Respondents) v Hudson (FC) Appellant

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    56.  A makes an offer to B. B accepts it, believing that he is dealing with C. A knows of B's mistake, and may even have deliberately caused it. What is the result of the transaction? Is there a contract at all? There is obviously no contract with C, who is not a party to the transaction and knows nothing of it. But is there a contract with A? And if so is it void or merely voidable?

    57.  Generations of law students have struggled with this problem. They may be forgiven for thinking that it is contrived by their tutors to test their mettle. After all, the situation seems artificial and is one which is seldom likely to arise in practice, at least in the absence of fraud. Unfortunately fraudulent impersonation is not at all uncommon today. The growth in the number of credit transactions, often entered into electronically between persons unknown to each other, has led to a surge in what has been called "theft of identity", that is the fraudulent assumption of another's identity by a customer in order to have the wrong account debited or to misdirect enquiries into his own creditworthiness. In the classic case A, fraudulently masquerading as C, buys goods on credit from B; B, having conducted appropriate checks to satisfy himself that C is worthy of credit and believing A to be C, lets A have possession of the goods; and A thereupon sells the goods to D, an unsuspecting purchaser, before disappearing without paying for them. Who is to bear the loss? That depends on whether D, who has paid for the goods, has obtained title to them, for if not then B can reclaim them. But D will have obtained title only if A was able to transfer title to him, and this turns on whether the transaction between A and B resulted in a voidable contract for the purchase of the goods by A (which B will have been unable to avoid in time) or no contract at all.

    58.  The problem is sometimes mentioned in the textbooks in the section which deals with the formation of contract, where the question is whether a contract has been concluded; but it is more usually dealt with in the section which is concerned with the effect of mistake and in particular "mistaken identity", where the question is said to turn on whether A's identity is (i)"fundamental" (in which case the contract is completely void) or (ii) "material" but not "fundamental" (in which case the contract is merely voidable). In his dissenting judgment in Ingram v Little [1961] 1 QB 31 at p. 64 Devlin LJ distinguished between the two questions and observed that it was easy to fall into error if one did not begin with the first question, whether there is sufficient correlation between offer and acceptance to bring a contract into existence. But if there is, I question whether the contract should be held to be void for mistake rather than merely voidable.

    59.  As I have said, the situation is seldom likely to arise in practice in the absence of fraud, and where the fraud is not directed to the identity of the offeror the contract is only voidable, not void, for the victim of deception ought to be able to elect to affirm the contract if he chooses to do so. It seems anomalous that a mistake which is induced by fraud should have a less vitiating effect than one which is not; and it is difficult to see why a mistake induced by fraud should make a contract altogether void if it is a mistake as to the offeror's identity (whatever that may mean) and not if it is a mistake as to some other attribute of his such as his creditworthiness which may be equally or more material.

    60.  As Treitel observes (The Law of Contract 10th. Ed. 1999 at p. 277) it is often difficult to say precisely what mistake has been made and, even when this is clear, it is often difficult to say whether it should be classified as a mistake of identity or of attribute. As between A and B themselves, of course, it does not normally matter whether the contract is void or merely voidable; it obviously cannot be enforced by A against B's wishes in either case. The question usually assumes importance only where an innocent third party is involved, and then it is critical. Under the law as it stands at present, his title depends on whether the fraudster obtained the goods in his own name by means of a false or forged credit reference or in the name of another by means of a genuine reference relating to that other. This is indefensible. I take the view that the law should if at all possible favour a solution which protects innocent third parties by treating the contract as voidable rather than void, whether for fraud or for mistake.

    61.  My Lords, I think that the time has come to follow the lead given by Lord Denning MR more than thirty years ago in Lewis v Averay [1972] 1 QB 198 CA. He roundly rejected the theory that if a party is mistaken as to the identity of the person with whom he is contracting there is no contract, or that if there is a contract it is null and void so that no property can pass under it: see pp. 206-7. He thought that the doctrine, derived from the writings of Pothier, should not be admitted as part of English law but should be "dead and buried". As he observed, it gives rise to fine distinctions which do no good to the law, and it is unjust that an innocent third party, who knows nothing of what passed between the rogue and his vendor, should have his title depend on such refinements.

    62.  But it is still necessary to answer the logically anterior and more difficult question: does the transaction result in the formation of a contract between A and B? There is clearly a transaction between them, for B has let A have possession of the goods and take them away, usually with the intention that he should be free to deal with them as owner. But is the transaction contractual?

    63.  It is trite law, as Devlin LJ explained in the passage immediately following that cited above, that before a contract can come into existence there must be offer and acceptance, and these must correspond. The offer must be addressed to the offeree, either as an individual or as a member of a class or of the public. The acceptance must come from one who is so addressed and must itself be addressed to the offeror. It is not possible in law for a person to accept an offer made to someone else; or to intercept an acceptance of someone else's offer and treat it as an acceptance of his own.

    64.  This is usually straightforward enough, at least in the absence of fraud. As my noble and learned friend Lord Phillips of Worth Matravers observes, there is normally no difference between the identity of the person to whom the offer or acceptance is directed and the person for whom it is intended. But what if, by reason of fraud, the two are not the same? What if A, posing as C, makes an offer to B which B purports to accept? B directs his acceptance to A, but intends it for C. It does not help to substitute the question: "to whom was B's acceptance made?" This merely raises the question: "what do you mean by made?"

    65.  The outcome is said to depend on B's intention objectively ascertained, and this is usually treated as if it were a straightforward question of fact to be determined on the evidence. In Ingram v Little (supra) Pearce LJ said at p. 61 that

    "Each case must be decided on its own facts".

    This is singularly unhelpful, since it involves asking: did B intend to contract with A believing him to be C? Or with C believing him to be A? The question is meaningless. As Devlin LJ pointed out in Ingram v Little (supra) at p. 65:

    "If Miss Ingram had been asked whether she intended to contract with the man in the room or with P.G.M. Hutchinson, the question could have no meaning for her, since she believed them both to be one and the same. The reasonable man of the law - if he stood in Miss Ingram's shoes - could not give any better answer…………All that Miss Ingram or any other witness in her position can say is that she did in fact accept the offer made to her; and that, if she had not been tricked or deceived, she would not have accepted it" (emphasis added).

    66.  In this situation the Courts have distinguished between transactions entered into in writing and transactions entered into orally between parties who are in the presence of each other. In the former case B's intention is ascertained by construing the description of the counterparty in the contract. This naturally identifies C, the person whose identity A has fraudulently assumed, and (provided that C actually exists) invariably leads to the conclusion that there is no counterparty and therefore no contract. In the latter case, the Courts have adopted a different approach. They have introduced a rebuttable presumption that, where parties deal with each other face to face, each of them intends to contract with the physical person to whom he addresses the words of contract. Unless the presumption is rebutted, this must lead to the conclusion that there is a contract with the impostor.

    67.  I do not find this satisfactory. What evidence is sufficient to rebut the presumption? As Devlin LJ stressed, it cannot be rebutted by piling up evidence that B would never have accepted the offer if he had not thought that it had been made by C. Such evidence merely shows that the deception was material; it does not establish the identity of B's counterparty. There might perhaps be something to be said for making the presumption conclusive. This appears to have been the law at one time in the United States. In Corbin on Contracts (1960 ed.) At p. 619 it is stated that

    "The Courts hold that if A appeared in person before B, impersonating C, an innocent purchaser from A gets property in the goods as against B."

But there is surely nothing to be said for resorting to a rebuttable presumption in order to resolve a question of fact which is incapable of being determined by evidence. If there is no test by which the question can be answered on the evidence, there is none by which the Court can determine whether the presumption has been rebutted.

    68.  But the real objection to the present state of the law, in my view, is that the distinction between the face to face contract and other contracts is unrealistic. I leave aside the criticism of the face to face rule made by Corbin on Contracts (loc. cit.) at p. 620 that it is

    "somewhat fanciful to hold that B intends to sell the goods to the physical body of A in front of him, although that body is indeed part of what we call 'identity'".

My difficulty is that I cannot see that there is any difference in principle between the two situations when it comes to identifying B's counterparty. In both cases B's acceptance is directed to the impostor but intended for the person whose identity he has assumed. Carleton Allen described the distinction as

    "admittedly fine, and [one which] has always caused doubt, though not necessarily dissent, in a good many minds": see 44 LQR 72 at p. 73.

He observed that text-book writers were divided on the subject, and that in the then most recently published treatise on Contracts the high but unhappily posthumous authority of Sir John Salmond leaned strongly against the doctrine.

    69.  In Ingram v Little (supra) Devlin LJ said (at p. 66) that

    "the presumption that a person is intending to contract with the person to whom he is actually addressing the words of contract seems to me to be a simple and sensible one".

I respectfully agree. But why should it be adopted only in the case of a contract entered into between persons who deal in the physical presence of each other? If the offeree's words of acceptance are taken to be addressed to the physical person standing in his presence who made the offer, what is the position where they deal with each other by telephone? Is the disembodied voice to be equated with physical presence? Is it sufficient that the parties are in the hearing of each other? Does it make a difference if the dealing is by televisual link, so that the parties are in the hearing and sight but not the presence of each other? New means of communication make the distinction untenable.

    70.  But in truth the distinction was always unsound. If the offeree's words of acceptance are taken to be addressed to the physical person standing in his presence who made the offer, why is the contract entered into by correspondence different? Why is the offeree's letter of acceptance not taken to be addressed to the physical person who made the written offer which he is accepting? The offeree addresses the offeror by his assumed name in both cases. Why should this be treated as decisive in the one case and disregarded in the other? Indeed, the correlation between offer and acceptance is likely to be greater in the case of a contract entered into by correspondence, since the offeree's letter of acceptance will either be sent to the impostor at his own address or be delivered to him personally and it will almost certainly contain internal references to his offer.

    71.  In my opinion there are only two principled solutions to the problem. The law must give preference, either to the person for whom the offer or acceptance is intended, or to the person to whom it is directed, and must do so in all cases as a matter of law. The difficulty is in deciding which solution should be adopted, for there is much to commend each of them.

    72.  The first solution, which gives preference to the person for whom the offer or acceptance is intended, possibly accords more closely to the existing authorities, which treat the face to face transaction as an exception to the general rule, and with the decision in Cundy v Lindsay (1878) 3 App. Cas. 459, the only case on the subject which has come before the House. It also accords more closely with the parties' subjective intentions, for B intends to deal with C, especially if he has checked his creditworthiness, and not with A, of whom he has never heard; while A has no intention of being bound by contract at all. From his point of view the supposed contract is merely a pretence to enable him to get hold of goods without paying for them. He does not need a contract, for he is content with possession without title. In the days when the law distinguished between trickery and deception, he would have obtained possession by a trick rather than title by false pretences.

    73.  The strongest argument in favour of this solution, I suppose, is that it could be said to be based on the parties' own assessment of what they mean by the counterparty's "identity". Ultimately this must refer to a physical person, but a physical person can only be identified by describing his or her attributes. For this purpose it is customary to refer to a person's name and address, which are usually though not always unique to one person. But names are merely identifying labels and can be assumed without any intention to deceive. A person is free to adopt whatever name suits his fancy, and may validly contract under an alias. Even if he has assumed a false name for the sole purpose of deceiving the counterparty, there is a contract so long, at least, as there is no real person of that name: see King's Norton Metal Co. Ltd. v Edridge, Merrett & Co. Ltd. (1897) 14 TLR 98.

    74.  But as Treitel observes (loc. cit. p.277) a person may be identified by reference to any one of his attributes. He may be identified as "the person in the room", "the person who spoke on the telephone", "the person who appended the illegible signature", "the writer of the letter under reply", or "the person who made the offer"; but he may also be identified, and sometimes more relevantly, as "the person whose creditworthiness has been checked and found to be satisfactory". Any of these may be the means of identifying a unique person. An automated telling machine is programmed to identify a customer by a combination of a pin number and a number encrypted on the card which is inserted into the machine. In an increasingly electronic age we are accustomed to identifying ourselves by pin numbers and passwords; the need to eliminate fraud may in time cause us to identify ourselves by retinal imagery, which at least has the advantage of being a feature of the physical body. But even in the case of a credit card transaction there is an ambiguity. Is the customer to be identified as the person who produces the card? Or as the person whose card is produced? The whole point of a credit card fraud is that the goods should be supplied to the person who produces the card while the cost is debited to the account of the person whose card is produced.

    75.  Given the equivocal nature of a person's "identity", there is something to be said for selecting those aspects of the offeror's identity which are material in causing the other party to accept the offer. In the present case, for example, Mr. Patel's name address and date of birth had no intrinsic relevance in themselves. The Respondent would have entered into the transaction with anyone, whatever his name and address or date of birth, so long as it was satisfied that he was worthy of credit. Mr. Patel's personal details were merely the information which enabled it to conduct inquiries into the credit of the person it assumed to be its customer. It makes commercial sense to treat a contract made in these circumstances as purporting to be made between the finance company and the subject of its inquiries rather than with the person who merely produced the information necessary to enable it to make them.

    76.  Nevertheless I have come to the conclusion that it is the second solution which ought to be adopted. All the considerations which I have mentioned, and which seem to favour the first solution, when properly analysed go to the mechanics of the deception and its materiality rather than to the identity of the offeror. They ought to come into play when consideration is given to the second question, whether the contract is voidable, rather than to the first, whether there is sufficient correlation between offer and acceptance ("consensus ad idem") to bring a contract into existence. Until the fraud is exposed and it is discovered that A is not C, the existence of a contract is not in doubt. The fraud is relevant to the question whether the contract is enforceable against B rather than its existence.

    77.  I regard King's Norton Metal Co. Ltd. v Edridge, Merrett & Co. Ltd. (supra) as worthy of more attention than it has usually been given. In that case, where the contract was entered into by correspondence, the rogue assumed a fictitious name in order to give a spurious impression of respectability. The Court held that there was a valid (though voidable) contract. The decisive feature was thought to be that there was no one of the assumed name. A.L. Smith LJ is reported at p. 99 as follows:

    "The question was, With whom, upon this evidence, which was all one way, did the plaintiffs contract to sell the goods? Clearly with the writer of the letters. If it could have been shown that there was a separate entity called Hallam and Co [C] and another entity called Wallis [A] then the case might have come within the decision in Cundy v Lindsay. In his opinion there was a contract by the plaintiffs with the person who wrote the letters, by which the property passed to him. There was only one entity, trading it might be under an alias, and there was a contract by which the property passed to him" (emphasis added).

    78.  It is unclear whether it would have made a difference if, unknown to the plaintiffs, there had been an entity called Hallam and Co; or if to the knowledge of both parties there were many such entities, as in the cases where a man used to book a hotel room for himself and a girlfriend under a common but fictitious name in order to give the impression (when such things mattered) that they were married. The case is different where the impostor assumes the name and address of a real person of substance when entering into a credit transaction. In such a case his purpose is to direct inquiries to that person's credit rather than his own. A better explanation of King's Norton Metal Co. Ltd. v Edridge, Merrett & Co. Ltd. is that the rogue merely assumed a false name and did not go further and assume another person's identity. But the distinction is a fine one which it may not always be possible to draw, and in any case depends on the nature and purpose of the deception and is accordingly relevant to its effect on the mind of the offeree and not to the correlation between offer and acceptance.

    79.  The typical fraudulent credit card transaction is also illuminating. There is clearly a transaction with the impostor who produces the card and who receives cash or goods (say a cinema ticket) in exchange. If the transaction is contractual in nature (as in the case of the cinema ticket) why should the transaction be thought to be with one person and the contract with another? There is only one transaction whether the party who parts with the goods debits the right account or is deceived into debiting the wrong one. Where cash is extracted from an ATM the fraud is possible because the machine is programmed to supply the cash to the person who produces the card and to debit the account of the person whose card is produced. In the same way the staff who handled the transaction in the present case on behalf of the Respondent were instructed (programmed) to obtain the customer's personal details, run credit checks on the person whose details were produced, and authorise the dealer to deliver possession of the vehicle to the person who produced them.

    80.  It is noticeable that, when recounting the facts objectively, judges often find themselves obliged to describe C as having accepted A's offer. I have already cited such passages from Ingram v Little (supra) and King's Norton Metal Co. Ltd. v Edridge, Merrett & Co. Ltd. (supra). In the former case, where the parties dealt with each other face to face, Devlin LJ has C say

    "that she did in fact accept the offer made to her; and that, if she had not been tricked or deceived, she would not have accepted it".

In the latter, where the contract was entered into by correspondence, A.L. Smith LJ said that the offeree "clearly" contracted with the writer of the letters which contained the offer, that is with A.

    81.  In my opinion, once one accepts that there are two questions involved: (i) did a contract come into existence at all? and (ii) if so was the contract vitiated by fraud or mistake? there is only one principled conclusion. Whatever the medium of communication, a contract comes into existence if, on an objective appraisal of the facts, there is sufficient correlation between offer and acceptance to make it possible to say that the impostor's offer has been accepted by the person to whom it was addressed. While a person cannot intercept and accept an offer made to some one else, he should normally be treated as intending to contract with the person with whom he is dealing. Provided that the offer is made to him, then whether his acceptance of the offer is obtained by deception or mistake, and whether his mistake is as to the identity of the offeror or some material attribute of his, the transaction should result in a contract, albeit one which is voidable.

    82.  This rule is easy to apply and accords with principle by distinguishing between the formation of a contract as a question of fact to be determined objectively and the consequences of mistake or fraud which depend on its effect on the mind of the person affected. It avoids undesirable refinements and gives a measure of protection to innocent third parties. Of course, someone has to bear the loss where there is fraud, but it is surely fairer that the party who was actually swindled and who had an opportunity to uncover the fraud should bear the loss rather than a party who entered the picture only after the swindle had been carried out and who had none. In the present case, the Respondent could easily have exposed the fraud by writing to Mr. Patel, whose address it had been given, and asking him to confirm his intention to proceed with the proposed transaction. If it had been one for which statute required a cooling off period, it no doubt it would have done.

    83.  In the Court of Appeal both Sedley LJ (who dissented) and Brooke LJ expressed disquiet at "the sorry condition" of the law. In the former's view, with which I agree, the decision in Cundy v Lindsay stands in the way of a coherent development of this branch of the law. We have the opportunity to restate the law, and cannot shirk the duty of putting it on a basis which is both just and principled, even if it means deciding that we should no longer follow a previous decision of the House.

    84.  We cannot leave the law as it is. It is neither fair nor principled, and not all the authorities from which it is derived can be reconciled; some, at least, must be overruled if it is to be extricated from the present quagmire. If the law is to be rationalised and placed on a proper footing, the formulation which I have proposed has the merit of according with the recommendations made in the 12th Report of the Law Reform Committee "Transfer of Title to Chattels (1966 Cmnd. 2958) and in Anson's Law of Contract (28th. Ed.) at p. 332. It would also bring English law into line with the law both in the United States and in Germany. The law of the United States has not stood still. Section 2-403 of the Uniform Commercial Code (14th. Ed. 1995) provides by sub-section (1)

    " … A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though

    (a) the transferor was deceived as to the identity of the purchaser…"

    Any restriction of the rule to face to face transactions has disappeared. In the Official Comment on the section, reference is made to "the long-standing policy of civil protection of buyers from persons guilty of such trick or fraud." This seems to me to be a policy which accords with good sense and justice and one which we ought to adopt for ourselves. I agree with the view of Professor Atiyah (An Introduction to the Law of Contract (1995) at p.86) that

    "…a person who hands goods over to a stranger in return for a cheque is obviously taking a major 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."

    85.  Under German law, too, the innocent third party obtains a good title, though this is a consequence of the law of property rather than the law of contract. Article 932 of the German Civil Code provides that a purchaser acting in good faith acquires title where he obtains possession from a seller who has no title. The purchaser is not in good faith if he knew, or by reason of gross negligence did not know, that the goods did not belong to the seller. Thus, under German law, whether or not A obtained title from B, he is able to pass a good title to D.

    86.  German law reaches this conclusion by admitting a far wider exception to the nemo dat quod non habet rule than we accept, and this enables it to dispense with the need to decide the contractual effect of mistaken identity (and the meaning of "identity" in this context) or to conduct a fruitless enquiry into the identity of the intended counterparty. Our inability to admit such an exception compels us to adopt a different analysis, but it would be unfortunate if our conclusion proved to be different. Quite apart from anything else, it would make the contemplated harmonisation of the general principles of European contract law very difficult to achieve.

 
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