CA-2024-002472 - [2025] EWCA Civ 1407

Peyman v Lanjani [1985] Ch 457 is a decision of this court which takes the knowledge required for an election to affirm one stage further. It holds that a party entitled to rescind or avoid a contract will not be held to have affirmed it unless it knows not only the facts which give rise to the right, but also that it has the right to rescind or avoid. The case concerned the transfer of a lease from the defendant to the claimant, which therefore required the defendant to transfer a good title. The lease contained a tenant’s covenant not to assign without the landlord’s consent. However, the defendant had only acquired his interest in the lease by what was in effect a fraud on the landlord’s agent. Because it was thought to be doubtful whether the landlord would consent to the assignment to the defendant, who spoke no English and was said to be of ‘scruffy appearance’, the defendant had been impersonated by an associate who did speak English. The same impersonation had then been repeated in order to obtain the landlord’s consent to the defendant assigning the lease to the claimant.

The claimant knew about the second impersonation, to which he had been a party, but the trial judge found that he did not know about the first impersonation. Importantly, he did not know the legal consequences of what had occurred, i.e. that the first impersonation meant that the licence to assign the lease to the defendant was voidable and the lease was subject to forfeiture, so that the defendant’s title was defective, and that as a result the claimant was entitled to rescind his agreement with the defendant for the transfer of the lease. In these circumstances, as Lord Justice Stephenson explained at 482A, the right which the claimant sought to exercise was the right to rescind an agreement made in ignorance of an irremovable defect of title. It was, therefore, a right which arose under the general law of landlord and tenant, and not an express contractual right.

Lord Justice Stephenson posed the question at 482D:

‘Is knowledge of the facts which give rise to the right enough? Or must there also be knowledge that they give rise to the right and hence to a right of choice?’

After an extensive review of the authorities, including three cases in the House of Lords (Evans v Bartlam [1937] AC 473, Young v Bristol Aeroplane Co Ltd [1946] AC 163 and Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850), Lord Justice Stephenson stated his conclusion at 487G that:

‘knowledge of the facts which give rise to the right to rescind is not enough to prevent the plaintiff from exercising that right, but he must also know that the law gives him that right yet choose with that knowledge not to exercise it.’

It is apparent that this was intended as a statement of general principle. Lord Justice Stephenson acknowledged that there would be some cases where statute requires a different rule (e.g. sections 11(4) and 53(1) of the Sale of Goods Act 1979) but otherwise made the point at 487D-E that the principles on which one party to a contract is held to affirm it are not peculiar to forfeiture of leases or even contract law.

One of the cases which Lord Justice Stephenson found particularly helpful in reaching his conclusion was the decision of the Supreme Court of Victoria in Coastal Estates Pty Ltd v Melevende [1965] VR 433. In that case it was held, after a review of English authority, that if the defrauded party does not know that it has a legal right to rescind, it is not bound by acts which on their face are referable only to an intention to affirm the contract, unless those acts involve something to the other party’s prejudice or detriment. It is important to distinguish here, as the court did, between election and estoppel. Ignorance of the legal right to rescind will mean that there is no election, even if the innocent party acts in a way which appears to amount to an unequivocal affirmation. However, those same acts, even if done in ignorance of the right to rescind, may nevertheless give rise to an estoppel if there is detrimental reliance by the other party.

Coastal Estates v Melevende was a case where the conclusion of the contract had been induced by the fraud of an employee of the defendant. Like Peyman v Lanjani itself, therefore, it was not a case of an express contractual right to terminate. Nevertheless, Chief Justice Herring suggested that in such a case, there may be a rule that a party is deemed to know the terms of its contract:

‘Now it may be that there are cases where it is proper to assume that a party to a contract, who has in the circumstances are right to disaffirm the contract, knows that he has such a right or at any rate to attribute such knowledge to him. Forfeiture clauses in leases may be cited as an example. Support for such a view may be found in the extract from the late Mr JS Ewart’s book entitled Waiver Distributed among the Departments Election, Estoppel, Contract, Release, at p.72 … In such cases, if the learned author’s view is correct, it would seem that the parties to a contract are to be deemed aware of the elections that the terms of their contract give them or at any rate are to be precluded from denying knowledge of them.’

Mr Riley relied upon this passage, but in my view it does not assist NHG for two reasons. First, as I read the passage, Chief Justice Herring was not endorsing the existence of such a rule. Rather, he was saying that even if there were such a rule, it would not assist the defendant in the Coastal Estates case because that was not a case of an express contractual right. Second, and of more significance for present purposes, there is nothing in the judgment of Lord Justice Stephenson in Peyman v Lanjani to suggest that he had this distinction in mind or intended to approve this qualification of the general rule that knowledge of the right to rescind is necessary for an election to affirm.

Having concluded that an election to affirm requires knowledge of the right to elect, Lord Justice Stephenson went on to pose a second question:

‘Where there is in fact no intention to waive or abandon the right because there is no knowledge of it, will that intention be presumed from conduct? This raises, in my opinion, two questions: (a) Does his conduct amount to affirmation of his contract, and abandonment of his right to rescind it? (b) Is he precluded, or estopped, by his conduct from denying that he has abandoned his contract? And in answering each question, the position of the other party to the contract must be considered.’

Lord Justice Stephenson’s answer was that there was no affirmation by the claimant, despite the fact that the claimant went into possession of the property and paid £10,000 to the defendant after he knew the facts of the impersonation, because there had been no detrimental reliance by the defendant. That is an analysis, premised on the decision already made that there had been no election, that there was no estoppel either.

Lord Justice May emphasised the need to avoid blurring the distinction between election and estoppel, which need to be considered in sequence. Dealing first with election, his conclusion was that:

‘The next feature of the doctrine of election in these cases which in my opinion is important is that when the person entitled to make the choice does so one way or the other, and this has been communicated to the other party to the contract, then the choice becomes irrevocable even though, if and when the first person seeks to change his mind, the second cannot show that he has altered his position in any way. This being so, I do not think that a party to a contract can realistically or sensibly be held to have made this irrevocable choice between rescission and affirmation unless he has actual knowledge not only of the facts of the serious breach of the contract by the other party which is the pre-condition of his right to choose, but also of the fact that in the circumstances which exist he does have that right to make that choice which the law gives him. To hold otherwise, subject to the considerations to which I shall refer in a moment, would in my opinion not only be unjust, it would be contrary to the principles of law which one can extract from the decided cases.’

Lord Justice Slade emphasised at 498B that although the issue arose in the context of a conveyancing transaction, it fell to be answered in accordance with the ordinary principles of contract law. He too was careful to distinguish between election and estoppel and, dealing with the former principle, concluded at 500G-H that:

‘With Stephenson and May LJJ, I do not think that a person (such as the plaintiff in the present case) can be held to have made the irrevocable choice between rescission and affirmation which election involves unless he had knowledge of his legal right to choose and actually chose with that knowledge.’

As a result (at 501D-E):

‘Since the plaintiff had no knowledge of his legal right to rescind the restaurant agreement, until he consulted new solicitors, his conduct in entering into possession of the restaurant and paying £10,000 to the first defendant, for this reason if no other, cannot in my opinion have amounted to an election to affirm the contract; the only remaining question can be whether the plaintiff by that conduct has estopped himself from relying on his right to rescind.’

It was, therefore, the clear conclusion of all three members of the court that where a party has a right to elect to rescind or terminate a contract, it will not be taken to have elected to affirm the contract if it did not know that it had such a right.