With v O’Flanagan 16 Mar 1936 [1936] Ch 575, CA

A vendor represented his medical practice's value during negotiations. His subsequent illness drastically reduced its takings before the contract was signed. The Court held his failure to disclose this change in circumstances amounted to a misrepresentation, allowing the contract to be rescinded.

Facts

In January 1934, the vendor, Dr O’Flanagan, was selling his medical practice. Through his agent, he represented to the plaintiffs (the purchasers) that the practice was taking in approximately £2000 per annum. At the time of the representation, this was true. However, shortly thereafter, the vendor became seriously ill, necessitating his absence and the use of several locums to run the practice. Consequently, the goodwill and income of the practice declined significantly. By the time the contract of sale was signed on 1 May 1934, the practice was virtually non-existent. The vendor did not disclose this material change in the practice’s value to the purchasers before the contract was concluded.

Issues

The primary legal issue before the Court of Appeal was whether a vendor is under a duty to disclose a change of circumstances which makes a previous representation, true at the time it was made, untrue by the time the contract is entered into. The central question was whether this failure to disclose amounted to an actionable misrepresentation entitling the purchasers to rescind the contract.

Judgment

The Court of Appeal (Lord Wright M.R., Romer L.J., and Clauson J.) unanimously allowed the appeal, reversing the trial judge’s decision. They held that the failure to disclose the change in circumstances was a misrepresentation.

Lord Wright M.R.

Lord Wright M.R. established that a representation made during negotiations is to be treated as a continuing one that remains operative until the contract is executed. He reasoned that a party making a representation to induce a contract has an obligation to correct it if it becomes false during the negotiation period. He stated:

If a statement has been made which is true at the time, but which during the course of the negotiations becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to the other the change of circumstances.

He considered it immaterial whether the failure to disclose was fraudulent or innocent; the crucial point was the duty to correct a statement that had ceased to be true, thereby preventing the other party from entering the contract under a misapprehension.

Romer L.J.

Romer L.J. concurred, articulating the principle of ‘continuing representation’. He clarified that while a representation is not a guarantee, if it is intended to be relied upon up to the point of contract, a duty to correct arises if it becomes false. He explained the legal position clearly:

…if a man makes a representation of an existing fact, the prospective purchaser of property is entitled to assume that that representation remains true down to the date of the contract. … a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation.

He concluded that if the maker of a continuing representation discovers it has become false before the contract is concluded, there is a clear obligation to inform the other party:

…he is under an obligation to the person to whom he made the representation to correct it.

Implications

The decision in With v O’Flanagan is a landmark authority in English contract law. It establishes a key exception to the general principle that there is no general duty of disclosure (caveat emptor). The case solidifies the concept of a ‘continuing representation’, confirming that representations made during pre-contractual negotiations do not exist in a vacuum but are considered to hold true until the contract is finalised. The judgment imposes a positive duty on a representor to correct a statement that becomes false due to a change in circumstances. A failure to do so constitutes a misrepresentation, providing the innocent party with the remedy of rescission. This principle ensures fairness in contractual negotiations by preventing one party from knowingly allowing another to contract on the basis of information that has become false.

Verdict: The appeal was allowed. The High Court’s order was discharged, and an order was made for the rescission of the contract and the repayment of the purchase price to the plaintiffs.

Source: With v O’Flanagan 16 Mar 1936 [1936] Ch 575, CA